Is it wiser to pay off your debt aggressively or should you begin to put money in savings? How do you decide which is best for your situation? This answer is a tricky one and one that you ultimately will need to decide.
The first step is to make sure that you are no longer living beyond your means. It does not make a lot of sense to be putting five hundred dollars a month into savings while you are charging that much or more a month on your credit card. If you have your spending habits under control, then it is time to look at the question a little bit more closely.
Many experts recommend that you have enough savings set aside to cover most emergencies. For many people this would be between one or two thousand dollars. This amount would cover car repairs, major appliances breaking down and many co-payments for medical insurance. If your situation is unique you may want to change the amount to match your situation.
The next thing you need to look at is your debt and the interest rates that you are paying on it. For example are you being financially wise when your rate of return is three or four percent on your savings, and the interest you are paying on your credit card or car loan is significantly higher than that? It is best to take care of the loans with the high interest rates first, which will save you money in the long run.
When it comes to paying off your home versus saving money, this is a difficult decision. You do want to save for retirement, and put enough money away to cover several months of expenses. At this point you may want to split the extra money between savings and debt repayment.
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