Our recommendation is to prioritize paying down significant debt while making small contributions to your savings. Once you've paid off your debt, you can then more aggressively build your savings by contributing the full amount you were previously paying each month toward debt.
It's best to avoid using savings to pay off debt. Depleting savings puts you at risk for going back into debt if you need to use credit cards or loans to cover bills during a period of unexpected unemployment or a medical emergency.
Paying Off Debt Can Help You Retire Early
You can put your income into savings rather than using it to pay bills. That is highly effective if you want to retire early, and even more so if you start saving sooner rather than later. This gives the power of compound interest the ability to work its magic over time.
Rather than focusing on interest rates, you pay off your smallest debt first while making minimum payments on your other debt. Once you pay off the smallest debt, use that cash to make larger payments on the next smallest debt. Continue until all your debt is paid off.
If you're already close to maxing out your credit cards, your credit score could jump 10 points or more when you pay off credit card balances completely. If you haven't used most of your available credit, you might only gain a few points when you pay off credit card debt. Yes, even if you pay off the cards entirely.
What is the 50-20-30 rule? The 50-20-30 rule is a money management technique that divides your paycheck into three categories: 50% for the essentials, 20% for savings and 30% for everything else.
Pros of paying off debt
You can reduce the amount of interest paid over time. This is particularly helpful if you have high-interest credit card debt. It can help improve your credit score. Once your debt is paid, you can focus fully on saving and other financial goals.
Most financial experts end up suggesting you need a cash stash equal to six months of expenses: If you need $5,000 to survive every month, save $30,000. Personal finance guru Suze Orman advises an eight-month emergency fund because that's about how long it takes the average person to find a job.
How much is too much? The general rule is to have three to six months' worth of living expenses (rent, utilities, food, car payments, etc.) saved up for emergencies, such as unexpected medical bills or immediate home or car repairs. The guidelines fluctuate depending on each individual's circumstance.
Many experts agree that most young adults in their 20s should allocate 10% of their income to savings.
By age 30, you should have saved close to $47,000, assuming you're earning a relatively average salary. This target number is based on the rule of thumb you should aim to have about one year's salary saved by the time you're entering your fourth decade.
“The absolute fastest way to raise your credit score is to pay off all your debt or as much as you can. ... Paying off all your credit cards or installment loans quickly could raise your credit score because this behavior shows lenders that you can handle different types of credit.
When you have maxed out your credit cards, your credit utilization ratio goes up. This makes a negative impact on your credit score. However, when you repay the debt, your credit utilization ratio goes down. This helps to increase your credit score.
The Rule of 72 is a calculation that estimates the number of years it takes to double your money at a specified rate of return. If, for example, your account earns 4 percent, divide 72 by 4 to get the number of years it will take for your money to double. In this case, 18 years.
This suggests you should intend to save 20% of your monthly income or every paycheck. This rule advocates putting 50% of your income toward your essential expenses each month, spending 30%, and then saving the remaining 20%.
Here's a final rule of thumb you can consider: at least 20% of your income should go towards savings. More is fine; less may mean saving longer. At least 20% of your income should go towards savings. Meanwhile, another 50% (maximum) should go toward necessities, while 30% goes toward discretionary items.
In general, there are three debt repayment strategies that can help people pay down or pay off debt more efficiently. Pay the smallest debt as fast as possible. Pay minimums on all other debt. Then pay that extra toward the next largest debt.
Total Savings vs.
The best way to pay off $3,000 in debt fast is to use a 0% APR balance transfer credit card because it will enable you to put your full monthly payment toward your current balance instead of new interest charges. As long as you avoid adding new debt, you can repay what you owe in a matter of months.
Put your card in the freezer and create a budget that includes a line item for reducing debt. Get a second job and devote that income to retiring debt. Downsize everything from house to car to nights out on the town. Negotiate a deal with the card company for a lump-sum payment to settle the debt.
It's Best to Pay Your Credit Card Balance in Full Each Month
Leaving a balance will not help your credit scores—it will just cost you money in the form of interest. Carrying a high balance on your credit cards has a negative impact on scores because it increases your credit utilization ratio.
That's right, a debt-free lifestyle makes it easier to save! While it can be hard to become debt free immediately, just lowering your interest rates on credit cards, or auto loans can help you start saving. Those savings can go straight into your savings account, or help you pay down debt even faster.
It's best to pay off your credit card's entire balance every month to avoid paying interest charges and to prevent debt from building up.
As we have said, yes, 10K is a good amount of savings to have. The majority of Americans have significantly less than this in savings, so if you have managed to achieve this, it is a big accomplishment. If you can achieve 10K in savings, this will set you up really well for the rest of your life.
Saving $30K pre-tax is doable with a 401(k) plan and a decent match if you contribute the IRS limit annually. One only needs to set aside $19,500 per year to achieve that and actual effect on take home pay is more like a $12K per year net reduction in income.