You are in debt and you also want to save for a rainy day. What do you do? If your income is comfortable enough to cover savings and settling debt, it is good to do both at the same time -reduce your debt and build up your nest egg. What if your fund is limited and you have to make a choice? I would suggest you pay off your debt first. The reasons are not hard to find:
1. Interest on debt outpaces interest on savings: it does not matter it is a personal loan from a bank or your credit card debt because financial institutions have to make a living by charging more interest on loan and paying less on customers’ savings. So, it is not prudent to save and build up more debt.
Interest on debts grow without rain.
2. Avoid getting into bankruptcy: As long as you are in debt and it does not matter how small the amount is, when you do not do anything about it, the amount will snowball by accumulating interest on interest into an amount big enough for the bank to declare you a bankrupt.
3. Peace of mind: It is a good feeling to be free financially. Debt- free means stress-free and happiness.
Home life ceases to be free and beautiful as soon as it is founded on borrowing and debt. ~Henrik Ibsen
4. Plus point for your credit worthiness: Clearing your outstanding sum, especially your credit card debt, as soon as possible is the way to improve your credit score. It is also to demonstrate that you are a responsible person and you are credit worthy. It will be easier for you in future to secure another loan.
5. Save even more: As soon as your debt is fully settled, you can channel the same amount to your savings account and save even more.
Are you paying off your debt first?