Before Beginning a Savings Plan, Should You Pay Off Debts?
Individuals understand the importance of retiring their debts promptly. The faster the debt is paid off, less will be spent on interest. Paying off high rate credit cards can save hundreds or even thousands of dollars over a few short years. When debt is paid off, additional funds are available to use elsewhere. Most people should be creating a savings plan. Money in a plan is a good buffer in the case of a financial emergency. However, a long term savings plan will contribute to a more comfortable retirement. Both plans are important, so many people are confused on how and when to begin.
The key factors to consider are interest rates, i.e., rates that you are currently paying versus the rate of interest that you could be earning. As an example, if you are carrying credit card balances with high rates it would be in your best interest to pay these quickly. In today's world, earning more on an investment is less likely than paying your creditors. So it would be it would be smarter to begin saving money than paying off your mortgage. This is a good strategy due to the low interest rate and tax advantages that are associated with home loans. This approach would also apply to car loans and student loans.
In review, individuals should pay off their high interest debt first and then institute a savings plan. The advantage of such a plan is that it would provide an emergency fund, earn interest on those investments, and save the interest on your debt. Waiting to save until you are completely debt free will leave you with little or no savings over the long run.