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Money health 2014: Pay off debt or save?

Capital Region families: ever wonder if you should you focus on building up savings or paying off debt first? In a recent survey asking people what they would do with an extra $1,000, the results showed a near-tie between saving (42 per cent and paying down debt (41 per cent). (Money, October 2013)

Do you live in a cash cycle or credit cycle?
Photo by Joe Raedle/Getty Images

To find the best answer for you, ask yourself the following questions.

  1. Do you already have an emergency fund? Everyone needs emergency savings, even those with existing high-interest credit card debt. Because emergencies can happen at any time, you can’t necessarily count on credit cards or other loans to protect you. Aim to have at least three months’ worth of expenses in the bank. Even if money is tight, make putting aside a portion of your paycheck for emergencies a priority. If you already have an emergency fund, go to the next question.
  2. How much is your debt costing you? Many people don’t take the time to do the math. Here’s how: Make a list of all your loans (auto, mortgage, credit cards, etc.) and next to each amount, write down the interest rate. Multiply the two numbers, and that’s about how much that loan is costing you per year. That’s a valuable piece of information!
  3. Compare the results from #1 and #2. Would paying off a chunk of your debt save you more money than you could earn by saving the cash? If so, then you might be better off paying off the debt. Another important point to consider: What are your financial goals (buying a house, starting a business, etc.)? Assuming you have an emergency fund in place, the final answer varies with each individual, and might involve a mixture of both saving and paying off debt.

Get a handle on your financial situation, and January is a great time to do it.

Dave Balog teaches financial basics to families. 355-0967.

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