The average American household has 15,608 dollars of credit card debt. If you’re like most Americans, you’re looking for a way to shed your debt and start accumulating wealth. However, even as you’re paying off your credit cards, you may be wishing to save too. Many financial experts have cautioned that paying off credit cards should be your first priority. But is this always true? It depends. Take a look below to see which route may be best for you.
How Secure is Your Job?
These days, the idea of a lifelong job at the same company may seem the stuff of nostalgia. However, job security has an outsize influence on your ideal financial strategy. If you can expect to be employed for the next several years, the need for emergency savings dampens somewhat, though you should still try to set aside funds for unanticipated expenses. In this situation, it’s wise to put most of your money into tackling your debt. However, if your job is temporary, or you expect to be changing jobs in the near term, you should save at least three to six months of living expenses.
Are You Expecting Any Big Expenses In the Near Future?
If you’re in credit card debt, you’ll want to pay it down rather than splurge on a new car or fancy vacation. However, things happen—cars break down, you have to travel for an emergency or medical bills mount up. In these circumstances, if you have allotted all your discretionary income toward paying off your debt instead of saving, you may find yourself having to use your credit card to pay for any unanticipated expenses. To avoid trapping yourself in a debt cycle, make sure you have a solid amount of money in your savings account to pay unexpected bills even as you pay off your debt.
Another helpful tip: make sure you have generous insurance policies. Minimum coverage policies sound great on paper—until you need the cash for an emergency. Contact a local insurance agency to find out how to secure a lower-cost plan that still gives you all the coverage you’ll need to prepare for the unexpected.
How Much Debt Do You Have?
If you feel that you’re drowning in debt, the most financially sound thing you can do is to pay it off as fast as possible. “Snowballing” your debt will help you avoid massive interest payments that accumulate over the long term. If you’re looking to shave off interest, the worst thing you can do is to pay only the minimum required payment. However, if you are on a fixed income, or face an uncertain financial future, you may be better off putting some of your discretionary income into a savings account, even if that means less money to pay off your cards.
Why Not Do Both?
Conventional financial wisdom encourages you to pay off your debt before saving. While this reduces the total amount you will pay over time, it only makes sense if you anticipate stability in your life over the near term. If you anticipate having to live off your savings in the next several years, it’d make sense to continue to allot most of your resources to paying off your credit cards while also setting aside several months’ salary so that you can escape once and for all the cycle of credit card debt.