Debt Calculator: Pay or Save?

It's a nagging question for nearly all debtors: Should you hold off on saving until you can pay off your nonmortgage debt, or should you put a little money aside in case of an emergency? While you should run the numbers on a debt calculator, you'll likely want to consider some other factors as well.

The Pros of Paying it Off

If you consult a debt calculator, you'll see that it makes financial sense to pay off your debt before saving. After all, interest rates on savings accounts generally don't compete with the rates credit card companies and other lenders charge. That's critical because it means that you're essentially losing money if you put even one extra dollar toward your savings. Accordingly, many financial advisers suggest that people in debt calculate exactly how much they can put toward their debt in order to pay it all off as quickly as possible.

Don't Forget an Emergency Fund

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While a debt calculator may tell you to put all your spare income toward your bills, some financial advisers find that doing so often ignores an important reality. Simply put, people need a cushion, especially in today's economic climate. Financial advisers who suggest building a small savings before tackling your debt generally believe that you should amass between six and 12 months' worth of salary so you can handle any emergencies that might arise.

Blended Approach

Of course, there's always a middle ground, and some financial experts say the best thing to do is to blend the two approaches. Start by allocating the bulk of your spare income toward building a nest egg, while making a small dent in your debt. As that nest egg reaches its target, you can shift your priorities and designate a larger portion of your income toward tackling your debt. To stay on top of those changes, debtors should use a debt calculator to determine when they can make those shifts. And as they pay down their debt, it's important to prioritize by paying off high-interest credit cards first because those loans will cost more the longer you wait.