Debt Reduction
Debt Reduction or savings – Which must be your top priority?
You are not the only one out there, who finds it difficult to choose between debt reduction and saving, most of us experience the same. The current economic chaos is adding tremendous stress to Americans’ lives as they find themselves knee deep in debts and heading towards an uncertain future. The credit card debts, auto loans, mortgage payments all have piled up their debt burden further and their incomes fall short of meeting their financial obligations. Therefore, many prudent financial advisors suggest that you should safeguard 3 to 6 months of expenses in savings and at the same time should devote money to avail debt relief as fast and as soon as possible. However, the saddest part is that we have only one pay check to contribute to do only one thing at a time, and therefore we are compelled to prioritize between throwing money to pay off consumer debt and contributing towards our retirement account. Read on, to make the right move and steer your financial life to the right direction.
Debt reduction is the first choice-
Debt reduction mathematically should be the first thing to handle. Mounting debts and their high interest rates are not only impediments to your financial enhancement but also adversely affect your mental as well as physical health. Remember, to get out of a hole you have to quit digging down, therefore first make sure that you do not borrow any more loan no matter what the reason is. Eradicating a debt, which has a double digit interest rate, must be the best investment that you can ever make. Once you clear your debts, you can make steady contributions towards your saving plan. Thereby, many experts believe debt issues should be your primary concern. However, the rule is little different for people who strive to become debt free only to incur more debts. The moment they get out of the debts they start squandering money in an unwise manner instead of saving it.
Saving is the priority-
Counter arguments are also there. The moment we commit not to take out any new loan we need money in savings both to deal with emergency situations such as car break downs or huge medical bills and to lead comfortably on the post retirement days. According to the financial author Dave Ramsey there should be at least $1000 in your savings to provide a payment cushion before you start paying off the consumer debt.
Many financial experts argues that paying off the debts first and ignoring the retirement savings as well as a rainy day saving is not at all a fruitful idea. Debt reduction is necessary but not at the cost of your retirement savings. You must take advantage 401(k), retirement plan which has the potential to throw a ton of free money in your saving account. In addition, 401(k) is a tax deferred account which has the benefit of tax-deferred compounding on the principal. Last but not the least, in future if your outstanding debts force you to file for bankruptcy, you don’t have to part with your retirement account and you can keep it safe.
So, the bottom line is you should balance both debt reduction and savings and secure your financial life. Ideally, you can contribute 15% of your income towards retirement savings and use the rest to pay down your debt. Take into account the nature of your debts first, if it’s a secured debt like mortgage, with a reasonably low interest rate concentrate on savings more because debt won’t weigh on you. If you have high interest credit card debts, focus on eliminating your debts.
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