Should I Save or “Get Out” of Debt?
Should you get out of debt before saving? Well, my answer to this is, it all depends. Yes, it all depends on your own specific goals and what you want out of life. Personal finance isn’t always just a numbers game, that is why it’s called “personal” finance. There is a personal side to it that only applies to you and it varies for each individual. Each case is unique too. Some important factors are the amount of debt you have and the interest rates you are paying for them. You should ask yourself a few questions on deciding what to do. Are those debt payments tax deductible? Is my debt to income ratio within my means? Is this debt putting a stranglehold on the lifestyle I want to have? Can I afford the payments? etc..
In my opinion, I firmly believe you can do both!!! Paying off debt while also saving/investing a portion of your income shouldn’t be asynchronous. You can attack debt while growing your savings simultaneously. Just prioritize your goals based on your values and what you’re most passionate about. Your priorities may shift over time who knows? Example: Kris has an extra $400 after all of his expenses are paid for while having a car payment of $375 per month at 8% interest. Math would tell Kris to put that extra $400 on the 8% interest car loan until his car is paid off. But what if Kris loses his job? Has a last minute wedding to attend? Or a newborn baby on the way? Basically, what is Kris gonna do when random events in life happen. If you’re thinking “just put it on a credit card” then Kris will be falling deeper into the debt trap.
To avoid this debt trap I recommend starting with a quick emergency savings account that is separate from your checking account. You can start with any amount, but you want to have enough to at least cover small unexpected expenses in life. Famous personal finance author Dave Ramsey’s baby step number 1 recommends an emergency fund of $1000. Now back to this scenario where Kris has an extra $400 a month. If Kris is just starting out his career and doesn’t have much experience I’d recommend saving $300 a month and adding $100 to the car loan a 75% to 25% split. Realistically, $1000 is not enough for an emergency in 2017. We’re living in times where a medical bill can wipe that $1000 clean out. Now if Kris had a few years in the workforce under his belt and built a reasonable amount of savings let’s say 3 months worth of expenses, I’d recommend saving at least $150 a month still and putting $250 extra on his car payments. I don’t believe in just focusing on one thing 100% of the time. I’m big on diversifying your goals and also tweaking them according to your priorities at the time. What If Kris needed an emergency surgery to remove his wisdom teeth and with his insurance copay, he was left with a balance of $1500. He wouldn’t be able to pay that balance because after his initial $1000 savings goal, he’s been putting all of his leftover money towards his debt payments right? Now Kris would have to borrow more money and fall into another cycle of repaying someone else with an interest.
Don’t forget to pay yourself first. You are more important than any debt you may have. My theory is that we’ve been hypnotized as a society through advertising to consume beyond our means. To pay lenders before we pay ourselves, they reel us in with the promise of instant gratification. The idea of “borrowing now pay later” puts us in a hole to begin with financially. Some dig their way out of it and some fall deeper and deeper into the sunken place of debt. I’m not saying going all in while attacking debt is bad, I just want people to be aware of the unexpected events that may happen along your journey to being debt free. If Kris didn’t have a car payment at all he’d have an extra $775 per month total. Now when unexpected expenses pop up, there’s more wiggle room in his cash flow for him to withstand that. So Kris wouldn’t have to rely on a payday loan, borrowing from one of his friends or a personal loan from the bank. In the end, we all have a choice, you can choose to break the cycle and become debt free or continue to drown in debt. It’s all about how you calculate your risk and prioritize your goals.
Get Out, Director Jordan Peele, Universal Pictures. 2017
Georgina from Get Out via GIPHY
Chris from Get Out Sinking into the chair via GIPHY