Is it Better to Save Money or Pay Off Your Debt?

October 12 is National Savings Day. If you are fortunate enough to have an income that exceeds your bills, it can be confusing to figure out how to put that positive cash flow to good use. Is it better to pay off your debt or put it into savings?

Making an informed decision can have a profound effect on your finances.

Ask yourself these questions to determine how best to utilize your extra cash:

Do I have an emergency fund? Putting away some money is a good first step if you don’t have any savings. Even with high-interest debt, creating an emergency account before attacking your debt will provide greater financial stability. You’ll sleep better at night, too. The goal should be a few months’ worth of expenses, but aim for a minimum of $1000.

How risky is my source of income? Have you worked for the same company for 15+ years and expect to work for 15 more? Or is your company struggling? Do you have issues getting along with your new boss? A stable income would tend to favor paying down debt, whereas less stable employment tips the scales in favor of saving.

What rate of return do I receive on my investments? Knowing whether to save or pay on your debt largely depends on your investment returns. Can you earn a better rate on your investments than you’re paying on your debts?

What is the interest rate on my debt? Your credit card interest rate might be 19 percent or more. No one, not even Warren Buffett, can routinely achieve that kind of return through investing. If your emergency fund were in place, it would make sense to pay on your high-interest debt. 

Any debt with an interest rate above your investment return is a candidate for your extra cash.

What is the current rate for a savings account? If you’re not an investor yet, what rate of return could you expect with a savings account or other similar account? It’s probably considerably less than the interest rate of any debt you have.

What are my financial goals? If you’re nearing retirement and already have plenty of money set aside, get busy eliminating your debt! However, saving might be a more reasonable option if you’re sending your child to college next year. 

What’s most important to me? Think about which option puts your mind at ease. For some of us, stockpiling a lot of money in the bank is very soothing. For others, being debt-free feels better. Avoid ignoring the emotions surrounding your financial decisions.

“Paying down debt and saving are both worthwhile options for your extra cash,” says Daniel T. Lerner, Executive Vice President, Investor Services at David Lerner Associates. “The option that’s better for you will depend on your individual circumstances.” 

If all else fails, consider doing both simultaneously. Save a little and apply a little toward your debt. For many, this can be the best of both worlds.

IMPORTANT DISCLOSURES
Material contained in this article is provided for information purposes only and is not intended to be used in connection with the evaluation of any investments offered by David Lerner Associates, Inc. This material does not constitute an offer or recommendation to buy or sell securities and should not be considered in connection with the purchase or sale of securities.
To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. 
Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.
These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable– we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.
David Lerner Associates does not provide tax or legal advice. The information presented here is not specific to any individual's personal circumstances. Member FINRA & SIPC.

October 12 is National Savings Day. If you are fortunate enough to have an income that exceeds your bills, it can be confusing to figure out how to put that positive cash flow to good use. Is it better to pay off your debt or put it into savings?

Making an informed decision can have a profound effect on your finances.

Ask yourself these questions to determine how best to utilize your extra cash:

Do I have an emergency fund? Putting away some money is a good first step if you don’t have any savings. Even with high-interest debt, creating an emergency account before attacking your debt will provide greater financial stability. You’ll sleep better at night, too. The goal should be a few months’ worth of expenses but aim for a minimum of $1000.

How risky is my source of income? Have you worked for the same company for 15+ years and expect to work for 15 more? Or is your company struggling? Do you have issues getting along with your new boss? A stable income would tend to favor paying down debt, whereas less stable employment tips the scales in favor of saving.

What rate of return do I receive on my investments? Knowing whether to save or pay on your debt largely depends on your investment returns. Can you earn a better rate on your investments than you’re paying on your debts?

What is the interest rate on my debt? Your credit card interest rate might be 19 percent or more. No one, not even Warren Buffett, can routinely achieve that kind of return through investing. If your emergency fund were in place, it would make sense to pay on your high-interest debt. 

Any debt with an interest rate above your investment return is a candidate for your extra cash.

What is the current rate for a savings account? If you’re not an investor yet, what rate of return could you expect with a savings account or other similar account? It’s probably considerably less than the interest rate of any debt you have.

What are my financial goals? If you’re nearing retirement and already have plenty of money set aside, get busy eliminating your debt! However, saving might be a more reasonable option if you’re sending your child to college next year. 

What’s most important to me? Think about which option puts your mind at ease. For some of us, stockpiling a lot of money in the bank is very soothing. For others, being debt-free feels better. Avoid ignoring the emotions surrounding your financial decisions.

“Paying down debt and saving are both worthwhile options for your extra cash,” says Daniel T. Lerner, Executive Vice President, Investor Services at David Lerner Associates. “The option that’s better for you will depend on your individual circumstances.” 

If all else fails, consider doing both simultaneously. Save a little and apply a little toward your debt. For many, this can be the best of both worlds.

IMPORTANT DISCLOSURES
Material contained in this article is provided for information purposes only and is not intended to be used in connection with the evaluation of any investments offered by David Lerner Associates, Inc. This material does not constitute an offer or recommendation to buy or sell securities and should not be considered in connection with the purchase or sale of securities.
To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. 
Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.
These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable– we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.
David Lerner Associates does not provide tax or legal advice. The information presented here is not specific to any individual's personal circumstances. Member FINRA & SIPC.