Wednesday, December 7, 2011

Should I Pay Down Debt or Save?

What a great question! Honestly, this is one of the most common questions we get at the credit union.

**Disclaimer: this is an inherently individual question. Every family is in a different situation with different variables. This post is a generalization in every sense!** Smile

Here is our advice, If you are trying to decide what to do with some money; one of the best options is to pay down debt. By reducing outstanding balances you are saving money on interest cost, you gain some peace of mind, and you improve your net worth. However, as we all know, life happens! If all of your excess money is being applied toward debt payment and you have no emergency fund then if an issue comes up you will be forced to take on new debt.

To illustrate the process I decided to put together a decision tree for you: Picture2

So as you can tell the question really comes do to can you pay off the debt in 18 months or less. If the answer is yes – then go for it! If the answer is no, you might have to do some more saving along side your debt reduction.

The reason for this is simple. You cannot afford to put saving on hold for more than 18 months. It is essential to keep your intensity up and get rid of that consumer debt but you also have to establish a strong cushion.

1 comment:

  1. How does student debt figure into the decision tree? Would you place it at the top like consumer debt?