When I first started my where to buy ivermectin online debt free journey, I struggled with an all too common dilemma that many debt-free journeyers face, slay debt before saving money or do both at the same time? Initially, I wasn’t really sure what my plan of attack should be, so I did what most people do—NOTHING. But this obviously didn’t work out well for me! So eventually, without any sound reason whatsoever, I decided to do both. I just knew that having some money saved and paying down debt felt like the “right” thing to do at the time.
At the beginning of my journey, my savings account was my safety net. It was something that kept me anchored to the shore (my comfort zone and something I treated like a piggy bank) in the event that I drift too far out in the debt-free sea of dreams. Then one day, I came across a podcast with businessman and author, Dave Ramsey, and basically, he said that if you want to start getting out of debt and have money saved, throw all of it except $1,000 (this acts as a tiny emergency fund) towards your debt.
WHAT?! Throw all of my precious (<—think lord of the rings) savings at my $57,000 of debt? At the time, it didn’t seem like it would even make a dent or a difference! I eventually came around to the idea and took a leap of faith. However, that isn’t an approach I recommend for everyone because everyone’s financial needs and emergencies are VERY DIFFERENT. I also don’t recommend draining your savings to pay off debt—especially if it doesn’t make an immediate dent in what you’ve got going on.
Some people start their journey by saving 3-6 months of expenses for emergencies first, then they switch gears and kick paying off debt into overdrive, it all just depends. However, I do think you have to figure out what works best for you and your financial situation but also pushes you just outside your comfort zone in order to see some real significant financial changes.
Pros of Paying Off Debt First
1.) Your focus is on one thing
When you sow highly concentrated effort into one thing, you reap the benefits of that effort a whole lot faster. I once came across a quote that resonated with me: “if you try to catch two rabbits at the same time, you’ll end up with neither.” When your focus is placed on one task and one task only, you have no excuse or choice but to get it done. Whenever my attention is on something too long, I tend to get antsy and work even harder to get it done and out of my face. Focusing on one thing at a time will ensure you aren’t spreading yourself too thin.
“Extraordinary results are directly determined by how narrow you can make your focus.”
– Gary Keller
2.) Less stress in the long run
Let’s face it—having debt is like having a shackle, or one of those old-school ball and chain things from the 18th century tied to your leg. According to Merriam Webster dictionary, a shackle is something that checks or prevents free action. Debt is similar to a shackle because it sometimes can hinder forward progress in your life (in other words prevent free action). For example, let’s say you are looking to buy a home but your debt-to-income ratio is too high for you to qualify for a loan, you will always be stopped dead in your tracks if that’s the case.
Debt can also keep you in a job you hate, which may only compound the stress that already comes along with being in debt. Essentially, the sooner you can pay off your debt, the better off you’ll be, and the more freedom you’ll have in the long run. Paying off debt frees up cash, and allows you to stop taking money from your present and future to pay for things you purchased in the past.
3.) Saving on Interest
For simplicity sake let’s say you have a credit card with a balance of $10,000 that you pay 18% on. If you pay more than the monthly minimum, let’s say $250, it will take you 62 months to pay off this credit card. You will pay $5,402.27 in interest over this period. At the end of 62 months (over 5 years), you will have paid $15,402.07 for stuff that cost you $10,000 at the time.
Even if you do $100 more and your monthly payment is $350, it will take you 38 months (over 3 years) to pay off your credit card, and you will have paid $3,165.89 in interest which is $2,236.18 less than taking a little more time to pay off your debt. Case in point – the faster you pay off your debt, the less interest you’ll have to pay back in the long run.
Cons to Paying Off Debt
1.) Opportunity cost
An opportunity cost is the loss of potential gain from other alternatives when one alternative is chosen, which in this scenario, would be to pause contributing to savings to pay down debt. Depending on the size of your debt, this can have a BIG impact, and therefore, must be taken into consideration when you’re creating a plan. Let’s say you have $50,000 in student loan debt at a 6% interest rate.
According to investopedia.com, and based on historical records, the average annual return for the S&P 500 since its inception in 1928 to 2017 is approximately 10%. For however many years you are paying your student loan off, you are missing out on an average annualized rate of return of 10% on the money you could be saving. However, there is a flip side to that! Let’s say in 1 year the market return is 6%, and your interest rate is 7%, you’d actually be losing money if you invested/saved during this time because the interest rate on your debt is higher than the market return that year.
2.) Limited Cash Flow
If you’re throwing all your extra cash towards debt, you’ll also have to deal with limited cash flow/cash reserves. If something happens, would you have enough money to cover the emergency on hand without having to go into more debt? Chances are high that if the emergency cost more than $1,000 you would have to. For example, tying up all your cash could be catastrophic in a situation where you lost your job, and have been trying to intensely pay down debt.
3.) Compound Interest
Albert Einstein has been quoted saying that compound interest is the 8th wonder of the world. When it comes to money and savings, the longer you have your money in the game, the better it is. If you’re set on paying off debt first, this is also something to consider because you’ll be missing out on time in the market. You can literally start saving at 20 years old, stop at 30 and have more money for retirement than someone that starts investing at 30 with all things being equal.
Doing Both—Saving Money and Slaying Debt
Like me, if you’re struggling with what you should do, maybe you can and should do both. I always say, if it doesn’t feel right, don’t do it, and trust your gut. Do something that will stretch you just enough to where you can actually start seeing small incremental change. If you have FOMO (fear of missing out) and want to pay down debt but also want to save for your future, try both especially if your employer offers a 401k match or equivalent. A retirement match is free money so you might as well take advantage of it while you can. Save up until the match percentage, for example, if an employer says they will match 50% of the first 6% you contribute, then max out at 6% and throw the rest of your cash towards debt. That way you can reap the benefits of saving for retirement while intensely paying off debt.
Summary
Really it all boils down to how comfortable you are with your current financial situation and debt, which is really a unique situation for each person. I personally am not a “rip the band-aid off” kind of person, so I did both for a long time until I became impatient with my goal of becoming debt free and decided to change gears, pausing my 401k contributions, and putting all my extra income towards my debt.
Either way, you have to be comfortable with whatever plan you put in place! Always do your research and always consider all your options.
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