Your financial health is determined on the basis of the size of your investment, the debt you owe and the amount of your savings. Striking a balance between all of them is backbreaking work.
For all putting in loads of effort, you fail to have enough emergency cushions, sufficient money to invest and avoid taking on too much debt. Wages are not proportionately increasing due to the soaring cost of inflation, which is one of the reasons why people battle with a lack of funds when emergencies catch them off guard.
However, your frivolous spending is partly to blame for running out of money in your hour of need. Some people are buried in debt and often confused while deciding whether to pay it off or save or invest money.
Well, there is no clear-cut answer to this question, as it depends on your financial circumstances. One time, it makes sense to pay off your debts before you start saving money, while other times, it may sound like a foolish strategy. It is always advisable that you consult a financial advisor before coming down on one side of the fence or the other. However, the following tips can help you land up at the right decision.
How to decide if you should save money
Experts suggest that you must have savings that can cover expenses worth three months of living cost. You can build savings only when you create a plan and adhere to it no matter what. However, savings are out of the question when you have taken on too much debt.
Loans are expensive. They carry very high-interest rates and cost you even more when you are behind the payment dates. Not to mention, it makes sense to clear your significant debt first. If your budget allows you to save money, you should see if your bank offers more interest than the interest you have to pay on your debts.
It is anything but possible that your bank will offer greater interest than loans on your savings account. So undoubtedly, you should prioritise debt payments to savings. However, there are circumstances when you do not have too much debt.
For instance, you have monthly installment loans with no credit checks from direct lenders in the UK and credit card bills, you can manage to save money along with the debt payment. After meeting your monthly expenses, you will have to create a budget to see how much money you are left with. Whittle down your current spending and figure out if it allows for additional cash to be saved. Stick to your repayment plan.
In this situation, savings are particularly possible as you will pay down the loan in fixed instalments. As far as it is about credit card bills, you can avoid paying interest if you settle them on time.
How to decide whether to pay off debt or invest money along with the debt settlement
Of course, when you do not owe debt at all, you will save and invest your money. There will not be any problem doing so. However, when you have a lot of debt to pay off, it becomes seriously difficult to invest money. On the one hand, you have to settle your debt; on the other hand, you need to invest money to build your wealth to live off during retirement.
1. Too much debt you owe
It makes more sense to wipe off the debt more quickly if you have taken on too much debt at a very high interest rate. Make sure to clear credit card debt first because they carry outrageously higher interest rates. Though you can earn a higher return on investments, it is not suggested that you should pursue them if you carry very high interest-rate debt.
2. The size of the debt
Another factor to look at is the size of the debt you owe. If your debt is considerably high that it is blowing up your budget even though it carries a lower interest rate, you should avoid investing money. You should instead utilise your money to clear the debt. Keeping credit card balances and debt with very high interest rates has consequences. Your credit could go down, and late payment fees will add up to the cost of the debt.
Further, this increases the credit utilisation ratio too, reducing your chances of borrowing money at a lower interest rate down the line. If your credit utilisation ratio is very high, you are relying too much on your credit cards.
3. Retirement timeline
Last but not least, you will have to examine your retirement timeline. It is a awful idea to carry your debt into your retirement life. It is better if you have paid off all of your debts; however, technically, it is not possible to get rid of all debts, such as a mortgage, but your house is an asset, and it is building equity.
You should start investing money at a young age as you cannot make up for lost years of retirement investment. Therefore, you should try to balance between paying off the debt and investments.
How to simultaneously handle debt payment and investment
It is really challenging to manage both together, but experts say you cannot wait to have cleared all your dues to start investing money, as it is impossible to stay completely free from debt. Everyone has to take out auto loans, followed by mortgages, even though they are financially disciplined. Here are some of the steps:
1. Create an emergency fund
An emergency cushion can support you when you need an immediate injection of cash. You can avoid taking out a loan, and if you still need to borrow, the amount will not be much, so you can easily manage. Try to avail of funds from a responsible direct lender like LoansForever, which lends money at a lower interest rate.
2. Grab a side gig
Increasing your cash flow is another good way to be able to pay off the debt and invest money. Make sure to find a job that easily fits into your routine. You should also try to find a full-time job with higher pay.
The bottom line
Whether you should save, invest or clear the debt first depends on your financial circumstances. Bear in mind that the right approach for your friend cannot work in your favour. If you have a debt to eliminate, make sure to prioritise them. There is no point in saving and investing when outstanding balances are bursting out of your budget.
If you do not have a significant amount of debt, you can manage it along with retirement investment. Do not keep credit card balances and pay all your debts off on time, so you do not compromise with building an emergency cushion and retirement funds. In short, you will have to prepare your budget worthwhile.