5 Times You Should Save Before Paying Off Your Debt

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It is common to focus on getting out of debt when you are trying to turn your finances around. This is the change that will have the biggest impact on budgeting and reaching your goals. If you look at the amount you are spending on your debt payments each month, it makes sense to try to free up that money so you will have more to spend on the things that you love each month. However, there may be times when it is better to focus on saving before you start paying off your debt.

Making savings a priority during these times will help you improve your financial future.

Build an Emergency Fund

An emergency fund should be a priority because it is the tool that will stop you from relying on your credit cards. It can prevent you from sliding backwards as you work on getting out of debt. You can start with a small emergency fund of between $1000 to $2000. The amount should cover your insurance deductible. If you know you may have an expensive car repair bill, you may want to have enough to cover that too. Once you have that amount saved, you can focus on paying off your debt. If an emergency comes up, you can use your emergency fund to pay for it and then pause your debt payment plan as you rebuild your emergency fund. It can bring you peace of mind to know that an emergency is covered.

Might Lose Your Job

If you have heard that there may be possible layoffs or that losing your job is a real possibility, it makes sense to begin stockpiling as much cash as you can to cover you during the time that you are looking for a new job.

This can help any severance you get last a bit longer. The key to making this work is to switch to a bare-bones budget now. You will need to save any extra money you have to help cover expenses once you no longer have a job. This will keep you from running up more debt and give you more of a cushion to help you through the time when you do not have a regular paycheck.

Major Life Change on the Horizon

Major life changes can change your financial picture. Whether you are getting married or starting a family. It is helpful to have savings in place to cover unexpected costs and to help as you work out a new budget with new expenses. When you get married, you may take on additional expenses like paying for your own car insurance or health insurance. When you have a child, new expenses may include child care and baby supplies. Plus there may be additional medical expenses that you did not plan on having. Once everything has settled down you can take the extra money you saved and put it toward your debt all at once.

Retirement Savings

Another area where it makes sense to keep saving before you get out of debt is to put money into retirement. This does not mean that you are contributing your entire 15 percent, but rather, you are contributing up to the amount that your employer is willing to match. This is essentially getting free money for retirement and it will help you keep saving for the future while you are working on getting out of debt. Once you have finished paying off your debt, you should work on increasing your retirement contributions up to 15 percent of your pay.

This will set you up for a nice retirement.

Big Expected Expense Is Coming

There may be times when you know that a big expense is coming up and you should save for it instead of paying off your debt. These are things like knowing that your roof is going to need to be replaced in the next year or that your car is likely not going to make it another year. It is not remodeling your kitchen because you do not like it. You need to make sure the new expense is a necessity if it is going to take precedence over getting out of debt. All of the other expense can wait until you are out of debt. This can help you to stay motivated to get out of debt as quickly as possible.