So Many Shoes, So Little Money – Blog

Saving versus paying down debt

February 3rd, 2009

You’ve been really good. The statement chandelier earrings you were lusting after will have to sparkle on someone else. You’ve curtailed your spending and finally have some extra money this month. What should you do with it? Are you better off paying down some of your debt or tucking it away in your savings account? For overall finance purposes, paying off debt and saving are the same. Incurring debt is negative savings; paying down debt is savings; and savings are savings. That being said, the single best thing you can do for your finances is to pay down your credit card debt (see Barbie: January 23, 2008; Interest: January 15, 2008 and Gift Yourself: December 1, 2007).

Once your credit debt is gone, make sure you have some savings. You should have a minimum of three months living expenses saved up. This may take awhile, but it is really crucial. You want to be able to take care of yourself if you hit any bumps. Promise yourself you won’t touch that money unless there is an emergency.

Then turn your attention to your other debts – high interest, non-tax beneficial ones first. Just like there are good trends and bad trends, there is such a thing as good debt and bad debt. Not all debts are created equal.

For example, a college or graduate school education and a home are sometimes considered good debt because although you had to borrow money to pay for them, you have something of value after you have paid back what you owe, interest and all. You also get to deduct a portion of these debts from your taxes. Credit cards and car loans are often considered bad debt. The value of what you purchased tends to decrease after you borrowed the money to pay for them. Worse, you cannot deduct any portion of these debts from your taxes.

So pay off your bad debts first – as an added benefit, once you have paid them off your monthly income will increase. Earrings, here you come!

Filed under: Debt, Net Worth

Tags: Debt, saving