Tuesday, February 11, 2014

Tip Tuesday-Debt vs Save

With tax season upon us I want to share a bit that I've learned about savings and debt. When posed with an influx of cash (I'll assure you it's very infrequent) I am always torn with whether to save all or most of that cash or put it down toward my debts. It's hard to see how a few hundred dollars is going to make a dent in my several thousands of debt, but I imagine if I always thing that way I won't get the debt paid off very fast. I also know it's a good idea to have as much money put away as possible for emergencies. 

Thanks to US News here are a few things to consider:

1. How much do you have in emergency funds? It is said that everyone should shoot to have three to six months of living expenses saved in case of illness or being out of the job. There are way too many people who can't afford that luxury, but it's something to shoot for. (Currently I have 2-3 months of living expenses saved)

2. How much is your debt costing you? Make a list of all your debts listed next to their interest rates. Multiply the two numbers together to find out how much you are paying in interest charges per year. 
Example $1000 interest rate 2% (1000 x .02=$20 per year)
 (All my debts combined are costing me $1, 400 per year. With one loan specifically costing a ton! I can stand to save the most money in the long run by putting the majority of my extra money toward that one loan.)

3. How much money can you stand to earn by saving? If you choose to invest your savings you can earn much more than a standard savings or checking account. But can you afford to have your savings tied up when you may need it? (For me I have a tiny investment fund but at this point I feel more comfortable having a majority of my saving liquid so I can have it in the event of an emergency. My checking account earns me 1.01%)

4. What are you financial goals? Whether you are saving up for a big purchase or just trying to get out of debt this answer will surely help determine where you can shoot your extra money.   (For me it is getting out from underneath debt and saving money for travel.)

Upon reading this about.com article I pretty much was reading exactly what I thought to be true. By putting too most of your extra cash toward savings your debt is costing you more and more in the long run. By putting too much toward debt you are leaving yourself short of cash to use in an emergency, essentially pointing you to lean on credit cards and accrue more debt.  

The answer we both arrived at was to split your extra cash. If you take in $100 extra dollars per month (by extra I mean money that you have after paying all your living expenses and bills) you can put $50 toward debt payment and $50 into savings. (For me extra doesn't mean going out to buy extra new clothes, I've got more important things to do than that!)

So the long and short of it is that money is tough. I know that I'm not alone and a majority of Americans have debt and that it's just a part of life. Instead of getting too stressed over it I like to be thankful for the comforts I have. I am happy that I can make my payments and that I don't have people threatening to take what I own. If it's not this debt it's going to be another one. Maybe someday the debt fairy is going to sprinkle glittery dust on my computer and all those little electronic numbers will be 0s. I'll be watching out for her.