Whether or not you should pay off your debt first, before beginning to save, depends on what kind of debt you have. Some forms of debt, such as credit cards (often called revolving debt) and payday loans, are considered short-term and should be paid off as quickly as possible. Other types of debt, known as installment loans, are designed to be repaid over time. Examples of installment loans include auto loans, which can be considered a form of medium-term debt, since they usually have repayment periods of a few years, and home and student loans, which are considered forms of long-term debt, since they can have repayment periods of many years.
Usually installment loans are borrowed in one lump sum then paid back over a predetermined period of time. On the other hand, revolving debt has a balance that is designed to fluctuate, depending on how much is charged or paid each month.
Often financial difficulty results from carrying short-term, revolving debt for a long period of time. That’s because it tends to:
Carrying debt intended to be short-term over an extended period of time tends to consume an ever-increasing portion of your income, making it difficult to address other financial goals. If you have been carrying credit card or other short-term debt for a while, paying it down should be your first priority. If you are having difficulty paying down short-term debt, you might consider converting it into longer-term debt with a debt consolidation or similar type of loan.
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