This is the million-dollar question for so many people. Especially right now. Before the pandemic hit, there were a lot of people living paycheck to paycheck. The rent or mortgage would get paid, food would be put on the table and various debts repaid for the month. It would then be a case of rinse and repeat. So, is it better to save or pay off debt? It depends!

In 2019, Forbes reported that 78% of Americans were living paycheck to paycheck. Obviously, this looks different depending on who you ask as someone earning $100,000 a year could be living paycheck to paycheck just like someone earning $50,000 a year. It just depends on what your monthly expenses are. 

Then the pandemic hit. Job losses were in the millions. Suddenly, a lot of those who were living paycheck to paycheck no longer had a paycheck. A year on, many of us have found other jobs or have been able to return to old ones. But this completely unprecedented situation has hammered home for many the importance of having savings. But how do you save if you have debts to pay? Should you save or pay off the debt first?

Why Are We Living Paycheck to Paycheck?

The cost of living has been rising. This wouldn’t be so bad if our salaries had kept pace. But have they? We all know the answer to that. So, what happens if the rate at which expenses rise outstrips that of income rising? The budget gets squeezed, that’s what. Paying rent/mortgage isn’t optional. Neither is making repayments on credit cards or student loans etc. Half of us didn’t get a pay rise in 2019 and then the world got turned upside down last year.

Benefits of Paying Off Debt

Some of these are pretty obvious but let’s have a look.

1. You’ll reduce your debt-to-income ratio (DTI). Although your DTI doesn’t affect your credit score, it is taken into account when you apply for credit. You may decide you want to consolidate your loans and credit cards into one monthly repayment. Improving your DTI will definitely help should you take that step.
2. You’ll improve your cash flow. If you manage to completely clear an outstanding loan or credit card, that’s more money available to you every month. And who doesn’t like having more money?
3. It will relieve the mental burden that comes with knowing you have this thing to pay. That’s priceless.
4. You’ll have money to start saving or invest with us!

Benefits of Saving Money

Also obvious but here we go.

1. You’ll have savings! Having a little bit of money stashed away can come in handy for a whole host of reasons.
2. It should help ease that undercurrent of worry that comes with not having savings. What if car repairs are suddenly needed? Or there’s an unexpected hospital bill? Or what if the whole world comes to a grinding halt and you have no income?
3. You can build up your retirement fund.
4. You’ll be one step closer to financial independence. 
5. Maybe you can even go on a much-needed vacation.

Saving vs. Paying Off Debt: Which One First?

You may be screaming at your screen asking “Which one first?!”. The answer is both. Yes, both. What sense does it make to keep throwing all your money at your debts if it means having no savings? You need an emergency fund. We all do. 

As of April 2021, just over 20% of us have no emergency savings whatsoever. None. It’s recommended that we should have enough saved to cover three to six months’ worth of expenses. Don’t let that freak you out. You can start small.

How Do You Save & Pay Down Debt at the Same Time?

This will require some creativity and self-discipline. Here are some suggestions to get you started:

1. Write down all your expenses so you can see where your money is going. This will help you see where you may have some wiggle room.
2. Make cuts and changes where possible. Do you really need three subscription services? Could you maybe switch to a different network provider for a better deal?
3. Consolidate. We'll say it again: Consolidate! Bundling all your repayments into one with a good interest rate will save you money. 
4. Get yourself a 0% balance transfer. If you’re paying interest on credit cards, it will take you longer to clear them. You will also be paying back a whole lot more than you originally spent on the card. We know that some balance transfer deals are being stripped back but if you are able to get one then go get one. 
5. Save before you spend. Some people put aside whatever is left at the end of the month. But what if one month there’s nothing left? You’ll achieve your goals faster if you put aside a set amount as soon as you get paid and then spend whatever’s left. 
6. Put the cash you’ve now freed up into something relatively stable with good rates of interest. Relatively stable because it really makes no sense to go through all the things you’ve just read only to put the cash into something risky like a memecoin.

But What if None of this Works?

The suggestions that you get rid of some of your subscription services or any other ‘luxury’ (no matter how small) might not apply to everyone. There are some people who are barely getting by just paying rent and buying groceries. No trips to Starbucks or paying for Disney+. 

If you fall into this category, there are still things you can do. You may not have any of the ‘luxury’ items to scrap but maybe you can change where you shop. Even just for a few months. Choose a cheaper grocery store or maybe buy in bulk. 

Even if you only manage to save $50-$100 at the end of the month, it’s a start.  If you can, maybe take on a side hustle. None of this is meant to be permanent. You only have to do this long enough to build up an emergency fund. 

It’s a Balancing Act

Choosing between saving and paying off debts can be a frustrating decision to try and make. For a lot of people, they just wanna get rid of the debt as soon as possible and that means throwing all their money at it. But if 2020 taught us anything, it’s that we need to be prepared for the unexpected.

Your debt is your responsibility and we are all for handling your business. There are ways you can pay of your debt a little quicker but it’s definitely worth trying to save at the same time. Doesn’t matter how small, just make a start. You’ll be glad you did.

Continue learning more about financial trends and tips like this by downloading the WealthStack app for free on the App Store or on Google Play.