Sometimes it’s hard to figure out when you should save and when you should pay down your credit card debt. You don’t want to have debt and owe money; however, you also want to make sure you have some savings built up. With the average U.S. household credit card debt standing at $15,252, many Americans are in this predicament, according to Nerd Wallet. So, what should you do? How do you determine what’s the smartest move? Here are some ways to help you prioritize paying down debt and building up savings.
1. Make sure you have a sufficient emergency account
There should be at least $1,000 in it, which you can put it in a savings account or even in your checking account if you want to protect yourself against overdraft fees, Forbes writes. Make sure you don’t touch this money unless it is an actual emergency. Also, make sure you have access to enough assets to cover at least three to six months of expenses (or more, if you’d like.) Home equity lines and credit card limits don’t count and, if you’re counting on selling investments or borrowing from your retirement plan, ensure you’ll have enough even if the market takes a turn for the worse. You can kill two birds with one stone by contributing to a Roth IRA. It allows you to save for emergencies and retirement at the same time.
2. Tackle debt with a high interest rate attached
According to Bankrate, “low interest rates on savings accounts make paying off debt first a better choice right now.” For example, if you have $10,000 in savings and are earning 2 percent, and have $10,000 in credit cart debt at a rate of 9 percent, it’s similar to putting your $10,000 in an investment that you know will lose 7 percent a year.” This is the time to focus on paying down your obligations. Forbes recommends paying off any debt with interest rates over 5 to 7 percent.
3. Use a save-first approach when your employer matches contributions to the retirement plan
Bankrate writes that a matching program can be more important than repaying credit card debt, so make sure to maximize that match.
4. Don’t stress about immediately paying off cars
“Credit card companies are raising rates, slashing credit lines, and even canceling cards; the best way to insulate yourself from penalties is to have no balance. But you also need to keep enough money in your savings account to cover the mortgage payments if you cannot quickly find another job,” Oprah says. “If you deplete your savings to pay off the cars and campers, how will you be able to make the house payments if you are laid off?” Having said that, you could also consider selling one or more of the cars if you can make enough money to cover the loan balance of your other vehicles.
5. Always remember that balancing both is ideal
“If you have a sum of money at the end of each month that you could either put in a savings account or put toward a debt payment, cover your bases — split it up and do both,” according to U.S. News. That way, you’re getting rid of your debt while also ensuring you have money to fall back on in case something comes up.