Savings or Debt Reduction First?

Neither side is right for everybody. Most of the time you will earn more for your money by paying off high interest rate debts (15%-18%) first rather than put money into savings earning 1%-3%. Okay, so you're doing well at reducing your debt. However, suppose your car breaks down and since you have no savings you pull out that plastic to pay for repairs. So you won't be able to stick to the plan this month. Now say three months later the water heater breaks and you put that on the credit card.

Now lets flip the scenario. If you had some savings you could have covered that unexpected car expense and not have paid for it with credit. And although the savings is reduced you did not have to borrow on credit.

So which way is right? That is up to you. Building up savings may help you to commit not to accumulate any new debt. However, it may take longer to repay the debt.

Some recommend that every family have between 2 and 6 months of normal expenses saved for unexpected hard times. This can be done by putting $10-$20 per week into a separate savings account. This adds up over time. You never know when life circumstances can create financial hardship, unemployment, illness, divorce, etc.

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