Don’t Let Debt Get You Down - City Girl Savings (2024)

FAQs

Is it better to pay off debt or keep money in savings? ›

If the interest rate of the loan is exceeding your investment and savings vehicles, that could be a situation where it makes more sense to focus on paying off debt.

Assuming equal down-payments, you can handle a larger mortgage than your neighbor because your debt ratio is lower. If you keep your consumer debt in check, you will probably have a better credit score, which will merit a more attractive rate, all other things being equal.

The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings. The savings category also includes money you will need to realize your future goals.

Emptying your savings to pay off or pay a portion of your debt can be good until it isn't. If using your savings to pay off credit card debt means leaving yourself financially vulnerable, don't do it. That's not a good situation to put yourself in.

If you're looking for a ballpark figure, Taylor Kovar, certified financial planner and CEO of Kovar Wealth Management says, “By age 30, a good rule of thumb is to aim to have saved the equivalent of your annual salary. Let's say you're earning $50,000 a year. By 30, it would be beneficial to have $50,000 saved.

By the time you reach your 40s, you'll want to have around three times your annual salary saved for retirement. By age 50, you'll want to have around six times your salary saved. If you're behind on saving in your 40s and 50s, aim to pay down your debt to free up funds each month.

Generally speaking, try to minimize or avoid debt that is high cost and isn't tax-deductible, such as credit cards and some auto loans. High interest rates will cost you over time.

Wiping out high-interest debt on a timely basis will reduce the amount of total interest you'll end up paying, and it'll free up money in your budget for other purposes. On the other hand, not having enough emergency savings can lead to even more credit card debt when you're hit with an unplanned expense.

How much should you save each month? For many people, the 50/30/20 rule is a great way to split up monthly income. This budgeting rule states that you should allocate 50 percent of your monthly income for essentials (such as housing, groceries and gas), 30 percent for wants and 20 percent for savings.

At least 20% of your income should go towards savings. Meanwhile, another 50% (maximum) should go toward necessities, while 30% goes toward discretionary items. This is called the 50/30/20 rule of thumb, and it provides a quick and easy way for you to budget your money.

How to budget $5000 a month? ›

Consider an individual who takes home $5,000 a month. Applying the 50/30/20 rule would give them a monthly budget of: 50% for mandatory expenses = $2,500. 20% to savings and debt repayment = $1,000.

One of the key advantages of saving before paying off debt is the concept of building a financial safety net. An emergency fund, for example, serves as a financial cushion, shielding you from unexpected expenses, job loss or medical emergencies.

In general, even if you aren't actively using your credit card and you have a zero balance, it's still a good idea to keep the account open. That's because the credit limit on each card you have counts toward your overall credit utilization ratio.

The Bottom Line. When deciding whether to save or borrow, start by asking yourself how quickly you need the item. If it's not an emergency, saving up is often the best option. If it is an emergency, review your borrowing options and choose the one that costs the least.

If the trends signal that you should purchase soon, you may want to save for a home. It may make more sense to pay off debts if you're holding off on buying and are worried about the rates a lender may charge. Factors such as your credit score and DTI will influence the mortgage rate and terms a lender offers.

In principle, if you're offered a higher interest rate on a savings account than the rate you pay on your mortgage, it could mean it's best for you to save. However, if you're paying a higher interest rate on your mortgage than you could earn from a savings account, it might be best to pay off your mortgage first.

If you have an emergency fund saved, you're probably ready to prioritize paying off debt during a recession. When it comes to paying down debt during a recession, you want to focus on your highest interest debt first – things like payday loans and credit cards are a good place to start.

Millionaires typically balance both paying off debt and investing, but with a strategic approach. Their decision often depends on the interest rate of the debt versus the expected return on investments.