Should You Be Saving Money Or Paying Down Your Debts First? | Refresh Financial

Should You Be Saving Money Or Paying Down Your Debts First?

interest

Many of us working class Canadians are finding it difficult to save money and pay down our debts at the same time. With the amount of consumer debt Canadians are finding themselves in, that means that there aren’t a whole lot of us who are saving for retirement. But if you have a lot of debt, should you be saving your money over getting your debts paid off? Or is paying your debts off first the best move?

Paying off Interest Pays Off

Interest can cost you a lot. It may not seem like a lot month to month, but when you add up what you’ve paid in interest on all your forms of credit over the course of a year, you’re probably in for a decent sized shock. This interest you’re paying out, is far greater than the interest you would make if you’d been storing that money in a savings account. It is because of this simple fact that paying down your debts it’s usually the best way to go. Paying down your high-interest debts as fast as you can is going to save you more in interest over the long run, than you’d make if that money were in a savings account. In a way, it is a form of return on investment.

Put Aside Savings, Just Incase

There are, of course, always exceptions to the rule. It is a good habit to make sure you have a few months expenses in savings, just in case things go horribly wrong. Recently, the entire city of Fort McMurray, Alberta experienced things going horribly wrong. Life is not always in your control and it’s always best to be prepared for a few hard months. Make sure, before you work on lowering your debts, that you have a few months worth of cash tucked away somewhere, just in case the unthinkable happens.

Remember Retirement

Another exception is saving for retirement. There is no escaping old age, and there will come a time when you can no longer work. Making sure you have enough to live on when you’re no longer working is paramount to a secure financial future. If your employer matches the amount you contribute to your retirement savings, make sure you’re contributing enough to max out their contribution. You want to milk your employment for every cent it’s worth, while you’ve still got it.

 

Outside of your RRSPs and your emergency savings, paying down your high-interest debt should become priority number one. Not only will you be saving yourself a ton of money in the long run, but you’ll also be improving your credit score rapidly. This can play into your favour when you’re purchasing a home, rewarding you with a better interest rate on your mortgage and potentially saving you thousands, and it can leave you the option of seeking new forms of credit when you need it.

As with most financial questions, the answer is always more complex than just a yes or no. It depends on your situation, what you make and what you already have saved. In most cases, however, getting rid of high-interest debt is going to serve you best.

What do you think is more important: saving or paying down debt? Let us know in the comments!

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