A few weeks ago we talked about how you don’t necessarily have to give up investing to further your debt freedom progress. Another hot debate in the finance community is paying off debt vs saving. Should you be stacking up savings if you haven’t paid off all your debt? Dave Ramsey would say no. Get your $1,000 emergency fund in place and focus on your debt payoff efforts. But which is really better?
Paying Off Debt vs Saving
First, let’s talk about why this is such a hot debate. If you’re an avid Dave Ramsey follower, you know paying off debt to be the number one priority as far as your finances go. This is because once all of your debts have been paid, you will have more money freed up to put towards savings, retirement, and investments.
However, this simply doesn’t work for everyone. I don’t know about you, but $1,000 isn’t enough to cover a huge emergency in my life. With a new addition on the way, I’ve been feeling the push to save more than ever. Of course, part of that is definitely getting some things paid off to have more cash flow in general, but actually saving plays a role too.
So, which is truly better? There is honestly a case for both.
The Case for Saving
When it comes to deciding whether you should be saving or paying off debt, there is a good case for saving money. The more cash you have to fall back on in the event of an emergency or major life change, the less likely you will be to rack up more debt. For example, if you have a few month’s expenses set aside, you are less likely to lean on your credit card in hard times.
Similarly, if you are expecting a big change like we are, saving more money may seem appealing. Again, you will have more money stashed away for when things change for you. In our case, having a baby is a huge change, especially from a financial standpoint. When you are facing something like that, stashing away some extra savings is never a bad idea.
The Case for Paying Off Debt
While you are saving, you could certainly be paying off debt with that money. Many people in the debt-free community would argue that savings could be saving you money on interest, etc. That is absolutely true, but it provides less peace of mind and immediate cash on hand in the event you run into a financial emergency. That being said, there is a case for paying off debt instead.
When you focus on paying off debt vs saving you will be able to free up more money on a month-to-month basis. For example, if you are focused on paying off your car, paying that off can free up some serious cash monthly. In our case, paying off our car would mean an extra $488 per month. That would make a huge difference. Arguably, once you pay off these bigger bills, you can start saving more quickly. You can also free up more money to put towards other debts, making even more money available month-to-month.
Bottom Line: Do What’s Best for Your Family
Whether you are on team savings or debt payoff, you should always make whatever decision is best for your family. There is no one-size-fits-all for finance. Personal finance is just that: personal. If having more savings in the bank decreases your anxiety when it comes to your financial situation, stash away some extra money. At the same time, if making progress on your debt freedom goals provides you with more peace, focus on that.
Readers, what side of the fence are you on when it comes to paying off debt vs saving?