How to choose between paying your debts & saving

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Whether to save or pay off debts is a reality dilemma that has struck many in this hard financial times where every coin counts and incomes are not very appealing to the circumstances of most employees in Kenya.

Simple maths suggests that its probably better to pay off debt before saving for retirement but personal finance decisions are rarely so simple and wiping out debt first isn’t the right choice for everyone.

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Paying debt and saving money are both very important financial goals. They’re also steps you have to take to reach a bigger life goal—living well during retirement. You may want to go into retirement debt-free, but focusing on debt repayment now could mean you have to sacrifice building up your retirement savings. But how do you choose the best place to spend your money?

Weigh the benefits against what matters more

Is saving or paying off debt better when it comes to your money goals? It’s the ‘chicken or the egg’ debate in financial form, says personal finance consultant and educator Kassandra Dasent.

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“Saving and eliminating high interest debt both provide important financial benefits. Both goals are essential in creating and maintaining financial stability,” Dasent says.

The real question to ask yourself is not whether saving or paying down debt is better, but which one matches up with your financial priorities. Olson is firmly in favor of paying down debt first, especially if you’re stuck with a high interest rate on loans or credit cards.

Consider if its possible to do both

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It is possible to pay down debt and save money – if you have a clear plan and you’re fully committed.

“It doesn’t have to be an either or choice, but it’s imperative to assess your financial situation and how you feel in order to rank your goals,” Dasent says.

The first step is to create a budget, Olson says. This way you know how much money you have to work with once your living expenses and bills are paid. From there, you can decide how to divvy it up between savings and debt repayment.

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“You could split the money right down the middle, half for savings and half for debt,” she says, or choose a different percentage, like 80/20 or 60/40.

You might be paying more interest than you should, but having savings to cover sudden expenses will keep you out of the debt cycle.

Additionally, having sufficient savings provides peace of mind. Some people are unlikely to feel at ease with any strategy that causes their savings to fall below a certain level. For them, saving and paying down debt at the same time might be the best approach.

Ultimately the ideal approach is to strike a balance between saving and paying off debt.

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