Save it or Pay it?

One question I am asked a lot is “why should I put money into savings when I am paying interest on debt?” The question sounds logical: it seems crazy to put money in a 2% savings account if you are paying 22% on debt, so isn’t it better to pay down debt?

You should do both.

Don’t be fooled into thinking that a savings account is not necessary if you have debt to pay down. Savings accounts are like insurance against future debt. Say for example, that you are successfully paying your credit cards down using every last bit of your spare change. You are getting very excited at the progress you have made, but one month your car needs new tires, and your refrigerator needs to be replaced. If you don’t have anything in a savings account, what will you do? You will end up back in debt.

How much should you save?

In an ideal world your income would be divided as follows: 10% tithing (or charitable donations), 10% savings, and 10% debt payments. That leaves you with only 70% of your (net) income to pay your bills and buy things that you need. This is where good budgeting skills come into play. If you are thinking about purchasing a new home or car, you are at a critical junction that will determine whether or not you will be able to live on 70% of your income. When the choice is there, do not allow your expenses to exceed 70%. There are also things you can do to reduce your existing expenses. Check out books and look at articles on this website about living within your means. Also, be creative in thinking of ways that you can cut back on non-essential purchases. A good rule of thumb is that you can relax about your spending after: A.)You do not have any debt (except maybe a mortgage) and B.) You have 3 months of expenses put away in a savings account. If you do not have both, you should be very careful about your spending. If, after careful analysis, you cannot afford to put 10% of your income toward debt and another 10% to savings, you should figure out what you can do. Maybe you will end up with 15% debt and 5% savings or 5% debt and 5% savings or even 10% debt and 3% savings. Just make sure you are putting something into savings.

But my Bank charges me for savings accounts that are under $300.

There are a couple of ways to get around this. Some banks will waive the fee if you automatically deposit money into the account every month. Most credit unions and internet banks do not charge for a savings account at all. If you have your savings account at a different place than you normally bank, you will be less tempted to pull money out. The disadvantage is, that unless you have some money directly deposited into it, you may not make the deposits you intend to. If you would rather have a savings at your regular bank, just add a child onto the account and name them as beneficiary. The bank should waive the monthly fee until the child turns 18. Worst case scenario, if you have to pay a small fee on the savings account, it is still worth it to have one. Just don’t become a statistic! The average American is saving -2% of their income, which is down from 11% in 1985. source: www.bankrate.com