The balancing act between paying more than the minimum payment to rid yourself of debts and building solid savings can be a difficult one for some. Here are some things to consider when making this decision.
- What’s the interest rate on your loan or credit card? If your debt carries high interest, choosing to pay more and settle that bill first can be more financially beneficial in the long run. You will likely gain more by paying it off than the return on the average savings account or stock if you were to invest that sum.
- Do you have a cushioned savings account? Failing to maintain a solid emergency fund can potentially get you into bigger financial trouble down the road. Anything from a tire replacement on your car to an expected doctor bill can throw you off track. It is recommended to try and pad your account with enough money to cover at least three months of living expenses.
- Do you have an employer match through your job? If your job offers a retirement savings plan that has an employer match available, you want to contribute at least the maximum amount each month for the match. Forfeiting that benefit is essentially turning down free money.
- Will payments reduce your monthly minimum? Making payments to standard loans such as student loans and mortgages generally only reduces the outstanding principal. Paying over the minimum usually doesn’t cause your lender to recalculate and lower your monthly payment. In a case like this, it may be more beneficial to save some extra money instead.