To Save or not to save?
Having a savings is a key part of staying out of debt after you have cut your debt down. With savings, if something happens, you don’t have to use that dreaded credit card to handle it. But the real question is whether you should save first before you start paying down debts. As with most debt reduction ideas we’ve discussed, this has a lot to do with your particular situation. If you are in so much debt you can hardly pay your bills every month, putting savings aside may not be your best first step. .
When deciding about a savings account consider your interest rates versus interest earned. Most savings accounts only earn around 1% but the average credit card charges 18% interest. By paying off a credit card you have “saved” 17% more then the same amount in a savings account and permanently freed up a payment from your monthly debt load.
So when should you think about savings? Setting aside savings is a very important step along the way. If you can set aside a little savings while still paying on debt reduction, that can really work out to your benefit. That way you are making progress on your debt payoff plan while putting aside a little for emergencies. The key to savings is finding a balance that gives you an emergency fund while not interfering with your debt reduction plan. Setting up goals can really help, you may want to pay two or three high interest debts off first, then work on a savings.
How much should you save?
Sometimes answering this question feels like trying to answer the question, how much money is enough? It’s been my experience that there is never “enough” It depends wholly on what your saving for. When working towards financial freedom keep in mind that every bill you don’t have is a savings. I think everyone should go into retirement debt free so they can enjoy there retirement years with far less stress and money worries. There is nothing more sad then seeing a senior lose there home or struggling to eat well. When planning for retirement, getting rid of our debt should be a huge priority!!!
But right now, while your sitting here possibly drowning in debt with the worry of not being able to ever get ahead, a small saving is all you need. When you get to a point where you can put aside a little for savings start with a small goal. Just enough that can help you through a small unexpected bill, end of the year taxes, or a minor vehicle repair. Basically enough to help you through life's unexpected cost without using that credit card or taking out a loan! Then you can get back to paying down some more debt. When you get to where you can add to your savings again try to put aside enough where you could live comfortably on it for a month, then try for 3 months, then 6 months!
Something I would like to mention that is a huge help in a debt reduction plan is a checking account cushion. When, and only when, you get to a point where you have a few bills paid off and a little savings put aside, you should consider building a cushion for your checking account. A checking account cushion is an amount of money that is in your checking account but not considered in your budget. You know it’s there but you don’t consider it usable. It is an invaluable tool to protect your checking account, savings account and make sure bills are paid on time! We only recently started doing this again and it has proven itself over and over. It can be just $100 or $500+. It should be enough where if you get hit with a small unexpected bill or someone in the household accidentally makes a budgeting mistake your account is not overdrawn and you have time to correct it. If you do dip into your cushion, put it in your budget as a deficit and replace it ASAP just like it was a bill.
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