Should I pay down debt or save?
The answer to that question will vary depending on who you ask — and chances are, the person answering it will have strong opinions.
But the trouble I’ve found with a lot of the advice is, often, it errs on the side of too simplistic, too all or nothing. And while I’m not a financial expert, that has never felt right to me.
When it comes to paying down debt or saving, I don’t think it needs to be all or nothing.
Here’s a look at why and how we’re doing both.
Pay down debt or save? We’re doing both
When we started our debt-free journey, it was focused on exactly that: getting debt-free.
This made sense for us at the time. Our starting debt total was about $65K and included credit cards, a credit line, a car loan and student loans. Interest rates ranged from 19 per cent (credit cards) to, at the time, about 8 per cent (student loans). We knew the only way we would be able to get ahead financially would be to start clearing those debts.
So that’s what we did. Using the snowball method, we wiped out our credit cards, credit line and car loan quickly. By January 2019, the only debt we had left was the $47.5K student loan.
For the first year, we aggressively paid down the balance. And during that time, we paid $16K to the principal!
But while it felt great to see that balance shrink, we changed our approach for 2020.
Our 2020 financial goals
I set three financial goals for 2020:
- Be equipped to handle an emergency in excess of $4K ($1K per person/pet) without adding to our debt
- Be under $20K in debt by 2021
- Take one meaningful step toward the prospect of buying a house
For each of my three 2020 goals, I picked one “project” of sorts. Each of these projects was designed to bring us closer to our goals over the span of the year.
In other words, two of the three goals for 2020 are about saving money, not paying down debt. Setting these goals represented a significant shift in our finances.
So why did we make the change?
Saving while paying down debt helps us avoid more debt
This was a big motivating factor for adding savings goals to our current financial plan.
Having an emergency fund is so, so important in my opinion. And while there are some who advocate for a $1K starter emergency fund, I don’t think that’s enough for most people.
We have been very blessed to not have faced any huge crisis during our debt repayment.
That said, there have been times where our emergency fund has come through for us.
When our microwave bit the dust, our emergency fund paid for a new one.
When our car alternator died for the second time, our emergency fund helped us make up the difference that our car maintenance sinking fund didn’t cover.
And when a storm knocked out our power for 40-hours in June, knowing the emergency fund was an option made me feel a lot better about tossing the load of groceries we bought literally the day before the lights went out (we ended up using PC Optimum points to make up the balance in the end).
In each of these situations, having savings helped us handle unexpected expenses without adding to our debt.
Saving while paying down debt helps us make progress on other financial goals
Paying off debt is a big financial goal for us…but it’s not our only financial goal.
While I don’t regret the time we spent aggressively paying back our debt, that hyper focus on debt left very little room in the budget for much else.
Adding savings goals to our budget for 2020 enabled us to actually make progress in other areas — the most significant being to take a step toward homeownership — while still making great strides paying down our debt.
Balancing savings and debt repayment just makes sense to us at this point
This is perhaps the simplest explanation for why we’re doing both — right now, it’s the option that makes the most sense.
Thanks to our period of aggressive repayment, we are almost under $20K of debt. That’s significant on its own but to top it off, the interest on that loan is a whopping 2.45 per cent. While I want to wipe that loan out sooner as opposed to later, the low interest rate makes it feel significantly less urgent, especially as the balance shrinks.
On the other hand, having a stocked emergency fund and starting to think about where we might want to live in the future feels like more of a priority.
So…we’re doing both.
How we balance paying down debt and saving
For 2020, the way we went about paying down debt and saving was simply to make both things part of our financial goals.
In planning for the year, we set targets for each of our financial priorities, then worked throughout the year to hit them. We tracked our progress, both in a spreadsheet and in quarterly reports here on the blog.
And while we’ll fall a little bit short on two of our goals this year, we’re certainly farther along than we were last year.
If you’re looking for a place to start when it comes to balancing paying down debt and saving, the best suggestion I can offer is to make it part of your goals.
Whether to pay down debt or save may seem like a simple decision to make, but there are a lot of factors to consider.
Regardless of what you choose to do, taking time to consider your options is always worthwhile. We decided the best path for us would involve doing both, but at the end of the day, it really is based on your own personal situation.
What do you think: should you pay down debt or save first? Or should you do both?
Photo by Matthew Henry from Burst
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