When it comes to getting your finances in order, many start with two things: A lack of savings, and an abundance of debt. Now, while many measure their financial security by the amount in their savings account, that may not be the way to go. Building up a small fund for emergencies is good. Although, keeping multiple months’ worth of expenses saved can be counter-productive if you are carrying debt. There are a few different factors that should play into your decision, so we will go over a video that goes a little more in-depth. Should you focus on paying off debt or saving?
The Cost of Carrying Debt
One of the main points Kevin carries home here is the cost of carrying balances on things like credit cards. While savings are nice, it is often more imperative to lower the amount of interest you are having to pay each month. If you don’t, these balances act like a negative investment, sucking away equity month after moth. So, even though it may feel less comfortable to drain the savings to pay your balances, you are actually putting yourself in a more secure position that way. If you do run into an expensive emergency, you can always charge it back to the credit card. Worst case scenario, you end up in the same amount of debt. Best case scenario, you end up saving a lot of money over time.
How Much Should You Save?
While it can change depending on your situation, a thousand dollars is about as much as you need to save if you have debt. Your first priority needs to be minimizing interest. A thousand dollars will cover most basic emergencies, but won’t hold you back too much in regard to credit balances.
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