Debt Repayment vs Saving Smackdown

There is a big debate out there of whether it is better to save first or pay down your debts first.

Pay Debt

Your highest priority should be paying down your debt especially your credit cards and other adjustable rate debt. It should be obvious to everyone that inflation is here, even if it isn’t reflected in the official numbers that the Fed puts out. That inflation is going to be reflected in your cards’ rates, soon.

Right now the average credit card is charging 14% interest. That is a major millstone attached to your budget. You can do a lot if you can get rid of that 14% loss you keep having to pay.

Save

Saving is a good thing, it opens up options for you if you have cash or something you can quickly turn into cash. The important thing to remember is that there are different kinds of savings.

• Savings account
• Retirement account
• Emergency fund
• Food storage

Savings account

The first thing people think of when it comes to savings is a savings account. You simply let the bank hold your money for a small amount of interest, getting paid interest is better then paying interest. It usually isn’t very much. There are variations like money market accounts and CDs that may pay more. If you are in debt it is not so important to just save.

Retirement Account

Saving for retirement is a big concern for many people. It will be a lot faster and easier to save for retirement if you’re not bleeding out money to the credit card companies. There is an exception though, if your company does matching payments, max that out as that is free money and worth taking.

Emergency Fund

Emergency fund is something few people really think about, but here is the issue. If you are throwing all your money into debt repayment which is good and something comes up, a flat tire, a broken pipe, the washer dies, or your child breaks his arm, putting that on the credit card kinda defeats the purpose. Having an emergency fund is important but it is limited in size and scope. Once it is full throw everything else at the debt.

How big an emergency fund? At the very least it should cover 3 days of food, gas and lodging for an emergency evacuation. It can also be used to fix or replace a major household appliance, like the stove, refrigerator or furnace. Or enough to fix the car or replace half of the tires. It should probably be big enough to cover the deductible on your insurance, which should be set pretty high to keep the cost down.

Food Storage

Not all savings has to be in cash, and I am not talking about gold or other metals but rather food. Adding depth to your pantry allows you to skip going to the store if you need cash for other things. And if things go badly with inflation, your ROI will become quite high. Even if nothing happens you can have food to eat and enjoy.

Tagged as: debt, Emergency fund, Food Storage, money, Saving