It takes the simplest of calculations to work out that in order to evade any serious loss, the money you pay off as interest in debts should not be more that what you earn through your savings. While paying off or trying to settle debt can be expensive, having inadequate savings could put you in a situation where you can sink deeper into the debt trap. So what should you aim for? As common as this dilemma may be, there is no black and white answer. It depends as much on your individual financial goals as your means of income. A deeper look into both scenarios can help you establish your priorities.
Settle Debt Before Saving
The rate at which a bank lends you money is usually much higher than the rate at which you earn from your savings. The same is true for the rate at which credit cards are issued in the UAE. With an interest of 40 percent (APR), debt can accumulate at a rapid pace for cardholders settling the minimum 5 percent every month. As such, it makes perfect sense to pay off these expensive debts before you consider saving.
Saving Before Settling Debts
There are plenty of reasons why saving should be a priority, but setting aside for emergencies tops the list. Being hit with an unforeseen expense with nonexistent savings could put you in a situation where you may rack up more debt than you started with. If you don’t have adequate savings, mere debt settlement can backfire in case of a crisis. You may have to borrow again and this could easily turn into a vicious circle. Never underestimate the importance of an emergency fund with at last three to six months’ worth of living expenses.
Another situation where saving before paying off debts makes better sense is when you are dealing with a low interest loan like a car loan or salary-transfer personal loan and at the same time, are able to acquire a savings option at a higher rate.
The Balance Point
It may seem challenging, but it is possible to tackle both issues at once. The trick is to strike the right balance between the two. You may work out a strict monthly budget and systematically allocate your remaining income towards debt settlements as well as investments, keeping your priorities and financial goals in mind.
It is important to have a plan to settle debt as quickly as possible while saving for a secure future for your family. This can help you save greatly in interest and ultimately help you in reaching your financial objectives.