Learn if it's better to pay off your debt or save money. Understand the benefits and considerations of each, when one should be prioritized, and tips for doing both at the same time.
At Huntington, we know paying off debt and putting money into a savings account are each important. It's great if you can do both, but what if financial constraints mean you need to choose between paying off debt and contributing to savings?
To help you make this decision, let's start with understanding debt.
Understanding Your Debt
The first step to understanding debt is knowing debt terminology. Revolving credit, like credit card debt, and term loans, like a car loan, can affect your financial future differently. Revolving credit lines continue to rollover until they're paid off, term loans have a set ending. It's easy for revolving credit lines to get out of hand.
You also need to understand what annual percentage rate (APR) is and how that compares to annual percentage yield (APY). APR is what you pay on the debt you owe. APY is what you earn on savings. Knowing your APR and your APY gives you what you need to start turning these abstract ideas into concrete information.
We have a financial calculator to help you decide if you should pay off debt or put money into savings. First, you enter your balance and APR for the debt section, and then enter the monthly savings contribution and the APY for the savings section. The calculator will crunch the numbers and provide you with information that can help you decide which option will likely work best for you.
Calculators work with the information you enter. They cannot see your full financial picture, and everyone's financial goals and outlook are different. Remember, there are Huntington bankers at your local branch that can provide better recommendations than an online calculator, but a calculator is a good way to get started.
Paying Off Debt First
Paying off debt first comes with the benefit of reducing the amount of money you owe from interest.
If you decide it's best to focus on paying off debt first, then there are two methods to consider. The snowball method of paying off debt starts with the bulk of your payments going toward your lowest balance first, paying it off, and then working your way to paying off the next lowest balance. The avalanche method focuses on your highest interest rate debt, paying it off, and then working on the next highest interest rate debt. The snowball method provides smaller wins to help keep you motivated and decrease the number of payments you make, while the avalanche method could potentially save you more money in the long run.
We have an article that focuses on paying off credit cards and other revolving lines of credit. That type of debt may not fit neatly into the snowball or avalanche method because it doesn't have a defined end.
If you're feeling overwhelmed by debt, we can help you with a debt consolidation loan or provide some financial coaching from one of our bankers. Additionally, there's debt managing technology like apps and Huntington's household budget tools that can also be valuable resources while you take control of your debt.
You may feel more comfortable focusing on building an emergency fund before tackling debt. In situations where loans are secured at a favorable interest rates, you might prefer to save and invest in the hopes those returns will exceed the interest that accrues on your debt.
If the interest rate of the loan is exceeding your investment and savings vehicles, that could be a situation where it makes more sense to focus on paying off debt.
Focusing on savings comes with the benefits of not relying upon borrowing funds in the event of an emergency. We offer a variety of tools to help you reach your savings goals. We also have a list of 10 money saving tips and banking technology to help support building a savings account.
First, you can set up automatic transfers between your Huntington checking account and your Huntington savings account, as well as setting up a reoccurring transfer from another bank. This will transfer the amount you set at a pace you schedule. Second, we have Money Scout℠, a savings tool, that identifies small amounts to money to transfer from your checking to savings– automatically†. It analyzes your spending activity to help you save smarter. Finally, we have Savings Goal Getter℠, which is a savings goal tracker. Savings Goal Getter lets you set 10 individual savings goals, plus an emergency fund, all for one savings or money market account.
It's tempting to focus on saving money or paying off debt but it's better to try to handle both. This way you get the benefit of saving money from tackling debt while also having an emergency fund for the unexpected.
How You Can Pay Debts and Save
You will want to set a household budget before you try to wrangle debt and put money away simultaneously. The act of creating a household budget puts your financial situation in front of you in a tangible way.
We have a household budget calculator where you can see the numbers behind how much you're bringing in, how much you're paying out, and how much you have left over. You may also want to take advantage of Spend Analysis to help you create your budget or fill in the fields for the calculator. Spend Analysis uses real-time data input from your account to categorize your spending habits.
To get a feel for how much you can afford to save and put toward debt, create a budget using your expenses and savings rates as they are now. Then, adjust the numbers to accommodate additional payments toward debts and additional amounts going toward savings. Do the numbers add up? Is that feasible or do you need to think about cutting some discretionary spending until you pay down some debt or build up an emergency fund?