When you get hold of extra cash, often you come across a question - whether to use the amount to pay extra cash in order to reduce the debt level or to save the money for future, for the rainy day. Apparently, it may seem to be an easy question, or some of you may find a way out by saying that use some of the amount to reduce the debt burden and use the rest to save for financial emergency. However, before making the decision, analyze the following things which will help you make the right decision.
The return on investment you're expecting - You may decide to use the full amount or a major portion of it to invest in a profitable return. However, before doing so, calculate how much return on investment you're expecting. It is better to save some money which you can take out immediately in case you experience a financial emergency situation. You can also invest in stocks; however, acquire good knowledge regarding the organization and the stock market so that you're aware of the exact timing to sell it in order to make good profit. If you can do so, then you can financially benefit yourself much more as compared to using the amount to reduce or pay off your debt completely.
The interest rate which you're paying - Analyze the rate of interest on your debts and categorize between âgood debts' and âbad debts'. An example of a âgood debt' can be mortgage loan, since the interest rates are significantly low. Moreover, by paying down the debt, you become the owner of a property and a property usually appreciates in value. However, credit card debt can be considered to be a âbad debt', since the interest rates are usually much higher and you keep on making the interest payments till you're able to repay the debt in full. Some debts, such as, student loan debts, can be a good one or a bad one, depending on whether you have taken out a private loan or subsidized federal loan. Therefore, if you decide to repay your debts first or contribute the maximum cash towards reducing your debt level, then it will be easier to make the payment towards reducing your high interest rate debts. By doing so, you'll save on interest payments and make a positive impact on your financial future.
Which will make your financial future better - Some of the organizations offer matching contributions to the employee who opts for contributing to a retirement account at work. It can contribute to your future retirement earning. On the other hand, your lender/creditor can offer you discounts if you opt for paying down the debts comparatively earlier. At the same time, paying off debt can also boost your credit score, thus helping you in taking out loans at relatively lower interest rates in the future. So, here also, calculate where you'll benefit financially more and make the right decision.
It is advisable you weigh the pros and cons of both the sides, do the required mathematics and make the right decision regarding how much amount you should use to pay down debt and what amount to save for the rainy days or for the future. It may be easier for you to make the decision by consulting a financial advisor and discussing with him/her regarding these points so that he/she can guide you in order to build a better financial future.