Saving Money vs. Paying Off Debt: Which Should You Do First?

When it comes to saving, Filipinos are efficient—91% claim they have enough savings to meet their financial needs for at least 5 years, and another 46% claim to have started their saving habit before the age of 30. Despite this optimistic outlook, more than 80% also admitted to having high levels of personal debt, with a third relying on a line of credit to get through daily living expenses.

Unfortunately, while getting out of debt should be a top priority, it begs the question: should you be prioritizing it over building an emergency fund? The short answer is, “It depends.”

When to prioritize paying debts

Paying your debts off first is the best option for high-interest debt, like credit cards. This is because any savings you manage to gain won’t be enough to offset the debt, especially with compound interest in play. With the monthly interest rate for a card ranging from 2.00% to 3.54%, a debt of P20,000 can jump up to P20,708 in just a month, and up to P21,441.06 in two months, and so forth.

Aside from the financial burden, debt can have an impact on your psychological and emotional well-being. A 2019 study found that over 40% of Americans find it difficult to talk about debt with their friends and family, with more than 40% of employees distracted by financial problems, spending 3 hours or more dealing with money matters while at work.

Here are some ways to settle your outstanding debts:

When to prioritize saving for emergencies

In essence, an emergency fund is your answer to a what-if scenario: what if you suddenly lose your job, what if you get into an accident, what if your home is damaged in a natural disaster, and so on. Your fund should cover the costs for these unexpected emergencies without having to take drastic measures or severely affecting your financial situation.

If your debt doesn’t have high interest rates, you can prioritize setting aside money for your emergency fund. While most financial obligations can be planned for and expected, accidents and emergencies can occur at any moment. Having a backup plan that allows you to get through a tight spot will help tremendously.

Below is a list of suggestions for building your emergency fund:

Putting it all together

There’s no one answer to the debate of settling debt over saving up. It’s crucial to nip debts in the bud, especially if interest rates are large enough to increase your balances. However, it’s also important to be prepared and set aside money to cushion the blow of unexpected incidents.

It all boils down to understanding your situation and finding a way to address both your need for an emergency fund and paying off debts. Try planning your regular expenses and allotting specific amounts for clearing your outstanding balances and topping up your fund. As you progress, you may find a sense of security by taking a more active role in your financial situation.

For more options to level up your financial stability, talk to a Bancassurance Sales Executive at any BPI branch today.