Should I Save Money If I Owe Credit Debt?
Securing your financial health requires you to carefully evaluate all of your debts and financial abilities. If you owe credit card debt, you will have to choose whether to pay off the debt first or start saving money. There is no one solution that fits everyone, so you'll need to evaluate your situation carefully before deciding how to use your money.
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Paying Debts
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Managing your money often comes down to a simple evaluation of the math. Are you paying more interest on your credit card debts than you stand to make if you invest the money? Usually, especially with high-interest cards, the interest you pay is much higher than any money you can make. In these situations it's better to pay off your credit card debts before you invest or save your money somewhere else.
Retirement Savings
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In some situations, you may be better off saving for retirement than paying off high-interest debts. Michael Rubin, president of financial education provider Total Candor, says that saving for retirement when you have credit card debt is advisable if your employer matches your retirement contribution. Otherwise, you're usually better off paying down, for example, a 12-percent credit card debt than you are investing in a 2-percent savings account.
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Emergency Fund
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Some financial planners, such as Sarah Place, president and CEO of Place Trade Financial, advise that instead of paying down debt first, you should save money in case you need it. Build an emergency fund that you can access when you need it. Such funds should have enough to allow you to pay six to 12 months of bills if you lose your job or suffer financial difficulties. Once you build the fund, you can then start paying off your debt.
Debt and Saving
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You don't necessarily have to choose between only paying off debt and only saving money. If, for example, you can max out your IRA contribution while earning matching contributions from an employer and still have remaining funds available for paying off debt, you can do both. Also, you can develop a systematic plan for paying off debt while still devoting a portion of your income to building a small emergency fund. Talk to a financial adviser or credit counselor if you need help determining how to best use your money.
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