Savvy Brown Girl

Should You Save Or Pay Off Debt First?

June 19, 2021 Wendy Coop Episode 1
Savvy Brown Girl
Should You Save Or Pay Off Debt First?
Show Notes Transcript

Do you want to save or pay off debt first? It's a tough question and one that we all need to answer. I go over the pros and cons of both options in this episode, so you can make the best decision for your personal situation!

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Hello, and welcome to the savvy Brown Girl podcast, a podcast about personal finance and entrepreneurship for savvy women. This is Episode One, and today we're going to be talking about saving money versus paying off debt. Again, I am your host, Wendy Coop, a financial coach, and pastoral counselor. And I thank you for joining me today. Before we go any further, make sure you subscribe to the podcast to make sure you're notified when all the new fire episodes drop. So saving money versus paying off debt. That is a big, big question. Because you may be carrying a lot of debt, you may be carrying a little bit of debt, but your savings just might not be there. And let's face it, after the year and a half that we've had, I wouldn't blame you if your savings has been depleted a little bit. Just for context. I'm recording this episode on June 10, of 2021. So June 19 2021, I'm recording this. And we are still in a pandemic, things are starting to open up and things like that. But there are still a lot of people without work, though that's getting better. There are a lot of places that are hiring people. That's good. But over the last year, year and a half, a lot of people have had to deplete their savings because of unexpected caregiving kids being at home for school, job losses and things like that. And in the meantime, your debt may have risen, or it may have unfortunately just stayed the same. Either way, now you're facing the question with your budget, do you save more money? Or do you start paying off that debt? Well, I have some suggestions for you. And I just want to preface that by saying that every situation is different. So there is no one right answer here. And I don't think you can go wrong except to not do anything. So as long as you do one of the two, I think you're going to be okay. And of course, we are still in a pandemic. So take it easy on yourself. If you don't get to $5,000 in savings after a month, it just may not happen that quickly. And that's okay. So, to start off, in order to determine whether you're going to save money, or pay off debt, you need to know how much you have in savings, how much you spend each month, and how much debt you have. And by the way, if you don't know where your money's going, grab your free money tracker and see what you spent over the next month. And you can grab that at tracking my coins.com. Now, a lot of people in the savings versus pay pay off debt debate. Talk about this in terms of interest rates, they say well, you're dead likely has a higher interest rate, double digits, hello credit cards, then savings, which is usually an abysmal, tiny, tiny rate of interest that you're getting for letting your money sit in an account. But in the situation that we're in in 2021, I'm telling you, interest rates don't matter right now. They really don't. Because it's more important for you to have money to pay your bills and to keep the lights on and food in your tummy than it is to pay off the SIR MasterCard. Okay, let's just set some priorities there right off the bat. The other thing is, we also have to consider whether or not your income is regular, or semi regular, or whether it's pretty unpredictable. Those of us who work for ourselves can in the beginning have pretty unpredictable income. And that requires a special type of budgeting that we'll get into in another episode. But I will say if your income is irregular or unpredictable, then I think you should save first save the money first so that you have money to pay your bills on in the leaner months. So if you're in a feast or famine cycle, so to speak, save the money during the feasting so that you have money during the famine. Also, I'm going to recommend that if you are current on your debt payments and your budget is intact, that you go ahead and save first. You don't have to rush to pay off your debt. It's really not an emergency to pay off your debt. So you can Go ahead and save first in that situation. And if you're going to save first aim for at least three months of expenses, not income expenses. The differences is that if you lose your job, or are otherwise unable to work, you are not going to have the same level of expenses as you would normally live in your day to day life. So if you are facing a job loss situation or a period of time where you can't work, because you're sick, it's unlikely that you're going to need to keep all six streaming services, you know, up to date, like you don't have to have Netflix and Disney plus, and amazon prime video and all the things right like just stick with one. So you want the expenses, the necessary regular expenses to keep the lights on to keep food on the table, and to keep your sanity. But that may mean dropping your gym membership, okay, some of us still have those. If, however, you have steady income, and all your household items are taken care of pretty easily go ahead and start paying off that debt. And we're going to pay off the debt from the smallest balance to the largest balance, we're going to pay it off in that order. That's called the snowball method. Many people use it, I'm sure you've heard of it. But that's how we're going to pay off the debt in order so that you have your small wins. And you can snowball the payment from the small debt into the payment of the next largest debt. So really quickly, what that looks like is say you have something that costs you $42 a month, and then you have another debt that cost you $100 a month. But when you pay off the $42 a month debt, you're going to take that $42 and then you're going to apply it to the next largest debt, in our case $100. So your next debt payment will be $142. On on that next debt. And it just keeps going like that like in a snowball. So that you get out of debt faster, because over time, the payments you're applying are larger and larger and larger. And it's already in your budget. So you don't have to worry about coming up with extra money. Also, if you have at least six months of savings, and honestly, in 2021, I would say probably closer to 12. But if you have at least six months worth of savings, you should probably be okay with going ahead and paying off your debt first. Now, I am not a financial planner. I'm not a tax attorney, I am not a bookkeeper. So you may want to discuss this your situation with any financial professionals in your life. These are just general guidelines that I'm giving you here. And also in your budget, as you're saving or paying off debt. Don't forget to give or type that however the case may be for you. I'm a Christian, I taught for you that may look like more charitable giving. And it doesn't have to be a large portion of your budget because you're still working your way through savings and dead. But giving something even if it's a motivational $20.01 Hello, go Navy be army. Give, give, because when you give it does something outstanding and positive to you psychologically, and it gets you out of this Me, me. I'm concentrating on myself mentality and allows you to concentrate on other people. So don't forget that line item in your budget. So where are you going to get the extra money to save and pay off debt. My favorite thing to do to recommend is that you create a side hustle or get a second job, not my favorite side hustles my favorite. You can cut expenses, but there's only going to be so much you can cut, there's only going to be so many things that you can sell. So instead, I like to recommend starting a side hustle so that you have more room to maneuver in your budget, you have more money coming in regularly. And it gives you more options regardless of whether you're saving or paying off debt. So my recommendation for you is to choose a side hustle that can generate the most money with the least amount of work. That means something you already know how to do well. That could be writing, some kind of coaching, some kind of consulting virtual assistant work, what have you. That is unless you have time to learn a high value skill like Web Design, video editing or podcast production. And this doesn't have to replace your day job, but you don't want to burn out either. So that's why I'm recommending that you do something that either you have time to learn, or you already know how to do. You know, web design, for example, because I've been a web designer, many of you know that, you know, I can sell a website for three 510 $1,000, how much work that is on my end to produce a $10,000 website is going to be different according to the client. But that's an easier sell for some people with a skill set than, say, a $200 blog post. And yes, you can get paid more than $200 for a blog post. But it really just depends on who you're writing for, what you're writing and how much or how quickly, you need to get paid. So that's my opinion, on saving money versus paying off debt, which is to say, it's going to depend on where you are, and what your situation is, do you have savings already? How much debt do you have? And what does your budget look like? Taking all these things into consideration? Only you and your family can make the decision that's best for you. That's all I have for today. Thank you so much for joining me. Don't forget to grab your free money tracker at tracking my coins.com and I will see you in the next episode.