Posted August 2019 by Melissa Abraham-Smith
Finding the best path to achieving financial freedom
Sometimes you’ll find yourself wedged between a rock and a “financial” hard place…
...this often means having to choose between paying off debt, or saving money.
This can be especially difficult if you haven’t yet refined the art of budgeting.
So, what’s the go? Whether you’re paying off a credit card, personal debts, or your new set of wheels, when choosing where to invest your hard earned money it pays - literally - to work out which will provide the greatest financial benefit.
To help, we’ve created a list of the things you should consider before deciding whether to pay off debt or save money. It’s your fast-track guide to achieving financial freedom.
- Running the numbers and doing the math
- Listening to your personal motivators
- Assessing your emergency nest egg
Let’s jump right in…
1. Doing the math
Let’s start off with the nitty gritty…
Working out - mathematically speaking, at least - where you should put your money is the easiest part. All you need to do is compare the amount of interest you are paying on outstanding debts with the amount of interest you would receive if you put your money in a savings account.
It’s that simple.
If the amount of interest you’re paying on your debt repayments is higher than the amount you could be earning with a savings account, then the sensible choice is to snowball your (non-mortgage) debts and pay them off as quickly as you can first.
An exception to the rule here would be Kiwisaver or other investment and retirement saving schemes that you may be a part of. These contributions usually offer higher interest rates, and ensure you’re still saving for tomorrow while dealing with your debts today.
Tip: Do you have multiple debts to different lending providers? Consider rolling all of these into one loan. This will reduce the amount of interest you pay per annum, and leave you with just the single monthly repayment to make. Sounds like a win-win to us.
2. Listen to your personal motivators
Ever Kiwi is hardwired differently.
So here is where we tell you to follow your gut instinct…
...unless it’s telling you to spend more, of course!
Some of you may hate the thought of having debt lingering over your head. While others may see a loan as an opportunity to leverage wealth and act on opportunities you may have otherwise had to pass up.
Understanding what motivates you will help you pick the best option for your financial circumstances and allow you to reach your goals that much faster.
3. Your emergency nest egg
Having an emergency fund in case of...well, an emergency, is crucial.
There’s a common misconception that an emergency fund and savings are the same thing…
...these are different.
On the off chance that your circumstances changes, you are unable to work or are made redundant, the rule of thumb is to have 3 - 6 months worth of income set aside in an emergency fund in order to cover rent, food, fuel, loan repayments, and utilities.
The more you are able to put into your emergency fund, the better off you will be. That said, the amount you need to put aside will depend on your personal situation i.e. whether you are single or have a family, living at home or renting, your sources of income, risk of job loss etc.
If your nest egg is looking a little bare, then spending some time to build this up before paying off debt could greatly benefit your financial situation while eliminating some stress. It’ll save you from falling back on credit cards and running up more debt if the worst were to happen.
A great way to start is to put any spare or leftover funds aside for your emergency fund. Once you are comfortable with the amount you have behind you, you can start funneling extra money into your debts to get these paid off as quickly as possible.
This will leave you with a safety net while you chip away at your debts.
The choice is yours
So there you have it. In almost every circumstance, it’s a good idea to tackle your debts first before you start saving. That said, there are a few factors like those we’ve outlined above that you should consider first, before committing to your path to financial freedom.