Saving money or paying off debt?

When it comes to saving money and paying off debts, the question often arises as to whether it is possible and also sensible. Should I pay off the debt or save money first? Or should I possibly do both together?

The answer is that this depends entirely on your financial situation. Let’s discuss this in more detail.

This is how you determine whether you should save money or pay off debts.

There are different types of debt that each individual can deal with. Student loans, the loan for the car and the house, the overdraft loan, the payments for the new washing machine or furniture after the last move and more.

And depending on the financial situation, it may make sense to tackle the debt before you start saving money. But it may just as well make sense to save a little before you attack your debts.

And finally, both are also possible, namely saving money while you pay off your debts.

However, for each of these variants to be successful, you need a smart strategy.

When does it make sense to repay debts before saving money?

When designing a plan for your financial well-being, it is important to save money on reserves, for at least 3 to 6 months or more of your basic cost of living. Or you have saved a small nest egg for “rainy” days of 500 to 1000 euros for starters.

If you want to start paying off your debts now and have already been able to save one of these sums, that’s great. In this case, it may make sense for you to stop saving more money. Instead, you aggressively start paying off the debt with the highest interest rates.

Having savings means that you have a buffer for unforeseen expenses or an emergency. This protects you from having to make new debts at exactly those moments.

You can also consider using part of your savings to repay your debts. But only if they sufficiently cover what you need in an emergency as well as for your short-term goals. This is especially useful if the interest on your debts far exceeds the interest on your savings.

Once you have repaid the debt with the highest interest rates, you can start saving money again and increasing your savings.

If you fit into this scenario, it makes sense to pay the debt before saving money.

When does it make sense to save before debt repayment?

If you have a plan to repay your debts, but not yet an emergency penny, you should first save a small amount of money before concentrating on your debts. Life can happen and there is no way to predict when and how something will not go according to plan.

If you have a small amount of money available in such a situation, you can avoid taking on more debt.

If you fit into this scenario, it makes sense to save some money before you pay off your debts.

What about investments or debt repayment?

Personally, I think it makes a lot of sense to invest money and save more while you pay off your debts. However, for it to be worthwhile, you need a good strategy.

And this is not just about comparing the possible returns on investments with the interest rates on your debts. Rather, it means taking advantage of offers and the time with which you benefit from your retirement provision.

Some employers offer the possibility of a company pension. With a good offer, this can have a positive effect on the amount you will receive as a pension in the future. If you have this option, you can consider it despite debts.

It also makes sense to save 5 to 10% on your retirement provision even without a company pension.

If you have debt, your focus may be on getting rid of them quickly, but you should still do something for retirement.

With these small contributions to your retirement account, you make sure that you are doing something for your future. You are able to take advantage of the efficiency of compound interest and the long-term possibility of investing.

Saving the amount you need in retirement takes time. The more time you have, the more you can put aside and the more time your money will have to grow.

In this day and age, you cannot rely solely on your statutory pension, which should provide you with retirement.

Save money while repaying debts

Do you already have savings, a contribution to retirement provision and already a debt repayment plan? Then you essentially save money and pay off debts at the same time, and that’s a great approach.

However, to ensure that you are successful with this approach, create a budget and become best friends.

Your budget will help you track your income and expenses. Your goal with a budget is to keep your expenses as low as possible so that you can approach your debt aggressively, starting with the debt, with the highest interest rates.

Why the aggressive focus on your debt? This is because the cost of your debts in relation to the interest you pay is not worthwhile at all, especially for debts with high interest rates.

It makes more sense to pay off your overdraft loan with the highest interest rate before you save in a bank account.

For example, if you earn only 0.1% in your savings account, but pay 10% interest on your debts, you indirectly lose money by keeping your money in your savings account.

So it is better to pay off your debts as quickly as possible in order to then save money again and increase your savings and investment goals.

Use a calculator and compare.

Here you will find two calculators that can help you compare the repayment of your debt with saving money or investing so that you can understand the actual costs or benefits of your decision.

In conclusion

Whatever approach you choose to pay off your debts and save money, make sure you have a strategic plan so that it makes sense and you don’t lose any money.