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Save Money or Pay Off Debt?

by Jonathan on March 8, 2011 · 8 comments

For the past few weeks, I’ve been debating this question in my head. I’ve sort of had an idea of where I stand on this issue ever since I can remember, but lately that’s been changing a bit, as I find myself pondering whether I’ve been saving enough money for the last couple of years. I’ve only been working full time for 14 months, and have manged to pay off a lot of debt, but the amount of money saved hasn’t been nearly that amount. Is this a bad thing? Here are my thoughts.

A thoughtful analysis really comes down to comparing the pros and cons of each.

Saving Money

Pros

– By putting more in savings, you have money to fall back on in case of emergency. Thus we have the case for the emergency fund.
– Savings accounts yield a marginal amount of interest. If you haven’t heard yet, online banks are the way to go.
– By saving money, you can pay for large ticket items, such as cars and furniture, with money you own, rather than charging on a credit card.
– Saving money gives me a HUGE amount of peace of mind!

Cons

– Any money put into savings, doesn’t reduce debt levels, which means you’ll have to pay it off later.
– Savings accounts don’t have high interest rates, so any money earned will be minimal.
– It may feel like you have less money in your checking account to spend. (because you do!)

Paying Off Debt

Pros

– You won’t be paying large amounts of interest. Interest on debt is almost always going to be higher than savings account rates.
– You can have peace of mind in knowing that, one day, you won’t owe anyone any money.
– For mortgages, interest paid on debt is tax deductible, which lowers your taxable income.

Cons

– You won’t have as much money to keep for yourself when you pay more on debt.
– You won’t be able to take advantage tax deductions for quite as long.

What Do You Want?

Thinking about these items I’ve listed, I can clearly pick out a winner for myself. Depending on what you want, you may pick a different outcome, but for me, saving money is a clear winner over paying off debt a little quicker than normal. The peace of mind in knowing that I’ve got a large nest egg stashed away is really the deal maker, despite losing money in the interest portion of things. It’s pretty strange, though, that I’ve just come to realize this, because for the past year I’ve made debt reduction my main goal. Now that I’ve eliminated most of my debt, I’ve changed perspectives. This means that, instead of paying off our mortgage by the time I’m 30, which was my original goal, we are gonna shoot for age 35, and put more money in savings, and fixing up the house. This doesn’t mean we’ll make the minimum payment on our mortgage though! As, I’ve stated before, banks are in the business of making money, and having customers make minimum payments is just the way they do it.

Some day, when I’m old and wrinkly I think I’ll be patting myself on the back for getting into this mode of thinking while in my 20′s. Paying off debt is certainly important, but if you’ve got nothing to fall back on when you need to fork out a bunch of money, you’ll fall right back into the hole you were in before you paid it all off. To be perfectly honest, I haven’t really gotten a thrill out of paying off any debt…unlike each Thursday, which happens to be my favorite day of the week. (since it’s Automatic Savings Deposit Day!)

What are your views on saving vs debt reduction?

Photo by Jake Wasdin

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About the author

Jonathan wrote 103 articles on this blog.

Jonathan is the founder and primary writer at CentsToShare. He enjoys reading above all else, but also gardening, building, eating healthy food and being self-reliant. Living a happy, stress-free life is possible, but it must be sought after, and not taken for granted. If you like the site, please let me know in the comments or through email - centstoshare@gmail.com. Thanks!

{ 8 comments… read them below or add one }

Jeff @ Sustainable Life Blog March 9, 2011 at 9:28 am

This is the great part about finance – there’s so many different ways of thinking and ways of doing things that if it works for you, you can never be wrong. For me, I’d rather focus on debt and save a little instead of putting all of my resources to savings. Part of this though, is that for the longest time I had a full warranty on my vehicle and adequate insurance. So if anything happened to me or the car (my main expenses) someone else was paying for it.

Now, I dont have a full warranty on my car, but starting monday, I’ll be using my feet to get to work.

Reply

Jonathan March 12, 2011 at 12:09 pm

It’s true, there really are numerous ways to go about things. And everyone does things a little differently. You’re situation makes complete sense, but I don’t have a warranty on either car, so saving brings more piece of mind. I’ll also be walking to work now, thanks for giving me the motivation to start!

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Prompt Retirement March 9, 2011 at 1:58 pm

What you said in your post definitely makes sense. The rates for debt usually are higher than savings rates. Personally I would pay debt off faster but as mentioned in your post I would have a very well established emergency fund before hand. I’m starting to think that the most debt I’ll have in life will be a mortage therefor if I could buy a cheaper house or save money while living at home then I could avoid the entire headache.

Reply

Jonathan March 12, 2011 at 12:14 pm

I agree the most debt I’ll ever have is our mortgage. It’s really the only debt I can tolerate having, mainly due to the tax deductions, and the fact that (theoretically) it can be treated like a savings account, since you can get most if not all or more of your money back if you ever sold.

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Tim @ Faith and Finance March 10, 2011 at 1:40 pm

You make some great points here Jonathan. My goal is to reach a point in my savings where I’m comfortable (in case of emergencies) then to focus on paying down debt (school loans). I won’t stop saving for long term (retirement) but once the main emergency fund and car fund is built up, my extra money will go towards debt.

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Jonathan March 12, 2011 at 12:11 pm

Thanks Tim, that sounds pretty similar to what I’d like to do. I’m very fortunate to have most debt gone, except for our new mortgage.

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