Updated: Jan 23
Financial Gurus like Dave Ramsey, member of the FIRE community, your friend and family are all saying that you should focus on paying back your debts before saving, but is this really the case?
When you’re in debt, saving money can actually be your best financial move. This only applies under certain circumstances. In my experience, there are only two reasons you should save money in spite of carrying debt.
You don’t have money for covering unforeseen expenses
Developing an emergency fund while you’re in debt may seem like a bad idea. But if you are already in credit card, overdraft or loan debt. It may not be that simple.
You may have maxed out the limits or committed to not accruing more debit so what do you have to help you avoid financial problems in the future.
The problem is, money that you have already used to pay off debt can’t be spent on anything else. It’s gone. But, money in an emergency fund is easily accessible and can be easily withdrawn to cover urgent expenses. This is why it is critical to have a cash emergency fund and you save this before paying anything but the minimum payment on your debt.
Therefore, If you don’t have an emergency fund, I strongly you read my other post; Emergency Fund - What, When and Why???
The interest rate on your debt is low
Usually, people try to get rid of debt fast because high-interest rates have substantial costs in the long run. However, If you have debts with a very low or 0% interest rate, then you may be able to focus on saving and only paying the minimum on this debt.
You should never ignore a low-interest debt and should continue to make minimum monthly payments. Having a budget is also super important in establishing if you should save or divert money away from a particular debt.
Sometimes there are circumstances where saving makes more sense than paying the debt. In cases where not saving could result in more debt and you do not have an emergency fund this small diversion can be a huge aid to long term success.