We all aspire to have financial freedom as we age. Often there are questions on how best to go about getting there. I posed the question in my Facebook group, Reduce Debt, Revive Dreams, of whether you should pay your debt off first or save money. Most of the people who responded were in favour of paying the debt off first. And that is a good strategy. After all, with debt you are paying interest, you are paying more money so paying the debt off faster makes sense. Right? Yes and no.
Paying your debt off faster will save you money in interest payments. But what happens if you have an unexpected expense and don’t have funds available to pay for that expense? Whatever are you going to do? Delay paying for the expense until you save the money? Alternatively, put the expense on a credit card? Probably the latter, right?
Now if you had savings, you would be able to take some of that money to pay for the unexpected expense. Then you would just have to work to replace the money taken from savings. In fact, Dave Ramsey advises you have a savings of $1,000.00 before taking drastic action to pay down your debt. On the other hand, if you have been paying large amounts on your debt – well over the minimum payment due – you have a bit a leeway.
For one month or two, you could just pay the minimum on your debt, which will be a lot less due to the large payments you have been making, and use the extra to pay for the expense.If it is an expense due immediately, you may have to use credit. Just don’t keep using credit and give up. Get back to your payment schedule as soon as you can.
Personally, my financial plan includes a mixture of both. I put money away in my TFSA (Tax-Free Savings Account in Canada) every month and make higher than minimum payments on my credit cards. Of course, I have found ways to lower the interest rates on all my debt and continue to look for more ways to do so. Whether you decide to save the $1,000.00 first, pay your debt off first or a mixture of both, remember it is possible to pay off that debt and move towards financial freedom at any age.
Do you need a speaker about debt reduction? Contact Karen here.
Karen is profiled in our Celebrate Audacious Series