What is the ideal amount to save when one is inundated with debt? This is a common predicament that many find themselves grappling with as they wrestle with their outstanding dues in a bid to stabilize their economic circumstances. It’s not unusual to observe individuals around you squirreling away money with impressive determination. I distinctly recall an article I came upon during my journey of debt reduction, which chronicled the author’s experience of having amassed an extravagant emergency fund. Many readers echoed this sentiment, mentioning how they too had over-saved and were deliberating on the best way to invest their surplus wealth. It struck me as a rather enviable dilemma to face!
It’s important to remember that monetary situations are unique and individual, so comparing yours with others’ can be fruitless. However, the following tips could assist you in discerning how much to save alongside managing your debt.
CONTEMPLATING YOUR KIND OF DEBT
Your debt category plays a pivotal role in determining your speed of repayment. For instance, a high-interest credit card debt should ideally be repaid sooner, resulting in more savings in the long term.
Settling your debts often guarantees savings as it lessens your interest payout. In my zeal to clear off my car loan with heavy interest, I apportioned a minor part of my savings and channeled more towards the loan debt. By doing so, I cleared a five-year car payment plan in a mere year and a half, saving thousands in the process. Thus, even if your emergency fund isn’t burgeoning during your period of debt clearance, paying off high-interest debt can lead to significant savings.
LOOKING AT YOUR DEBT REPAYMENT TIMELINE
Not certain how much to save amidst debt? Assessing your debt clearance timeline can be beneficial. If your student loan has a low-interest rate, a slower, progressive repayment approach might be suitable for you.
In case of a prolonged debt clearance journey, it becomes crucial to understand the necessity of a robust savings buffer. Unforeseen expenses frequently crop up and can hinder your debt repayment plan. An inadequate savings safety net can plunge you further into debt to cover these sudden costs.
APPRAISING YOUR LIABILITIES
Consider not only your different debt types but also other potential liabilities that might need extra finances. House repairs, car upkeep, health bills, and other but sizable expense are examples.
Typically, homeowners should have substantial savings, irrespective of debt. Home ownership comes with its own set of uncertainties. My spouse and I learned this within two years of purchasing our home, when we had to shell out funds for a new furnace, plumbing fixes, and foundational work.
ASSESS YOUR WHOLE FINANCIAL PICTURE
Along with an evaluation of your liabilities, an assessment of your overall financial status is crucial. Individual circumstances vary, it’s advisable not to base your decisions on someone else’s debt repayment scheme. There are numerous factors to consider when deciding how much to save.
SETTING AN EMERGENCY FUND OF YOUR CHOOSING
Now you can define your emergency fund. Dave Ramsey, a finance expert, suggests keeping aside $1,000 for emergencies, and then devoting everything else to debt payment.
Many argue that this is insufficient for any severe emergencies. For instance, an ordinary emergency room visit could easily cost over $3,000 depending on insurance coverage, and even more if uninsured.
My recommendation would be to customize your emergency fund to better suit your unique situation and provide a sense of security as you pay down debt.
RECAP: HOW MUCH SHOULD YOU SAVE WHILE IN DEBT?
The final decision on savings during debt repayment belongs to you, but it’s imperative to save an amount that’s achievable and practical. Consider the factors discussed and choose a number that pragmatically complements your debt repayment process. Refrain from comparing your approach to others, as each financial situation is distinct and personal.
