I know this is a cliche topic. Most will tell you that you should stop saving when you are paying down debt. Why do they say this? It is simple. The math isn’t in your favor when you take time to save. Debt usually comes with high interest rates. Depending on your credit score and what debt you currently hold, you could be paying over 20% in interest. That hurts!
I am not stranger to paying down debt. I took four years to pay off my over $50,000 worth of credit card debt. It was a journey for me, but that doesn’t mean it wasn’t a very valuable learning experience. One thing I learned during the process is that paying off debt should teach you two things. You need to learn why you spend more than you earn and you need to learn how to be a saver. Saving money is extremely important. Whether you need an emergency fund, want to buy a car or home, or retire with enough money to survive. Savings is very important. The problem is that most people are not good savers.
One problem that I see on a constant basis is that when most people are paying down debt, they are focusing just on that process. They want to just pay off the debt. The problem with this method is that they are not addressing the underlying problem. Why did you get into debt? Why are you spending more than you earn? These are legitimate questions that many don’t know how to answer. This is why creating a saving mentality is so important.
Since I love the controversial, I thought I would describe what I came up with when I was paying down my debt. I wrote about the process in detail, so I will give you the short run down.
I created a debt/saving allocation method similar to retirement investments. I calculate all of the extra money that I can pay toward my debt, after meeting the minimum payments. I then break up that amount and allocate some for debt repayment and some for savings. I created a fancy graph below that illustrates my method. While my percentages were different, the concept is still the same.
As you can see, I paid more toward debt for the majority of the time. After I got to a certain point, I flipped the equation and payed more into my savings and less toward my debt. The time frames can be different and changed for each individual circumstance, but the theory would still be the same. Yes, this did increase the time that I was paying debt, but it provided a much bigger win.
I switched my spending mentality to a savings mentality
This was a goal of mine. I wanted to learn how to save. Saving money is just so important, yet more people are focused on spending their money as soon as they get it. There is no reason why we have a massive debt problem in this country!
This method doesn’t work for everyone, but if you are paying down debt, take a look at it and see if it might work for you. Yes, it does work against the traditional math, but we still have to deal with the underlying problem and look at the emotional factor.