Many of us, during these tough economic times, are torn between saving and paying off debt. In times of economic uncertainty, it can be tempting to save up money while there is money coming in to be saved. At the same time, though, paying down debt is a big goal that many have. The path to financial freedom demands that debt be paid down as soon as possible — and that the future be prepared for.
As you try to decide what might be the best option for you, it’s important to take the following items into account:
- Do you have a basic emergency fund? Many financial gurus suggest that you have $1,000 in an emergency fund before you start paying down your debt. If you don’t quite have a basic emergency fund, build that up, and then tackle your debt.
- Do you have reason to believe your job is in danger? There are usually signs associated with upcoming lay offs. Sometimes the company will even announce them. Weigh your concern about losing your job, and determine how realistic that concern is. If you are unlikely to lose your job in the next few months, do all you can to pay down your debt. If layoffs have been announced, or if you feel your job is in danger, you might want to do all you can to build your emergency fund, paying only the minimum on your debts.
- What kind of return will you get? One of the problems with putting money into CDs is that the return is quite low. Indeed, any return you get from a CD is likely to be much lower than the interest you are paying on your debt. You might be better off paying down your high interest debt before it further erodes your wealth.