Is it better to pay off a debt or save money?

It can be a tricky situation when you find yourself with some extra money, and yet you have debts that need to be paid. Saving money is good, particularly in South Africa, where most people are losing their source of income because of the corona virus. On the other hand, you want to be debt-free. In such cases, the best way is to reason out all the facts, so you end up with a win-win solution. 

Saving money vs. paying off a debt

The best way is to look at each option independently. In this way, you can see the general advantages of prioritising each option. However, since your financial circumstances are unique, there is no one-size-fits-all solution to this decision.

Benefits of saving

• You can build an emergency fund – This is money that can save you when a rainy day comes. Instead of paying off your loan, you can put the money in a savings account. This means in an emergency such as a job loss you don’t have to borrow again.  

• You can save money on interest – You can earn interest on money that you put in a savings account. This literally gives you more value for your money. But to achieve this, you have to choose the bank or financial institution with the most favourable interest rates.

• It can be used to grow your pension fund – In situations where your employer makes an equal contribution to your pension fund, putting more money into your pension fund can be beneficial. For example, if you increase your contribution from R250 to R400, your employer now also has to contribute R400.

What’s the best way to save money?

It is considered best to save enough money to cover the cost of living for three or six months. By opening a savings account with high-interest rates, you can quickly build up your savings. So, if you find yourself with a little extra cash, just put it aside in a separate account and watch it grow.

Benefits of paying off debt

• It can reduce interest costs – There are cases where taking a loan or credit with high-interest charges can be very costly. This is especially so if you don’t pay back the loan as quickly as possible. Paying off your debt may be better than saving the money since it reduces interest payments. Hence, you can save more money compared to the interest you gain by having a savings account.

• It can save your credit record – There are many benefits of having a good credit record. It can help you qualify for better interest rates when you take out a loan. You also have a better chance of being approved when you apply for financial help or when you are looking to rent a house or apartment. On the other hand, having bad credit can keep you from doing all these things.

• Prioritising your debt saves you from the borrowing cycle – You have probably heard that having debts is a vicious cycle. Paying back loans with high interests can be very expensive. You end up trapped in a cycle of continually borrowing and struggling to pay back the total amount plus other charges. When you focus on paying your debts and living a credit-free life, you can save more money in the long run.

What’s the best way to pay off debt?

The easiest way is to budget for your monthly repayments. Any extra money that you get can go towards making those repayments. To make the repayment process more manageable and less costly, you can look at other options such as debt consolidation and credit card balance transfer. These allow you to place your debt under one account while lowering interest payments.

Conclusion

Analysing all the factors involved and how they apply to you can help you make the right decision. Saving and paying off debt both have their good points. Therefore, you can benefit from taking a two-way approach. 

This means putting extra cash into an emergency fund while at the same time using some of it to pay your debts. At the end of the day, the goal is to have peace of mind. Staying in control of your debt and having an emergency fund can both help you to achieve this freedom.

Photo by Briona Baker on Unsplash