A number of factors can determine your savings strategy. These include whether or not you have debt, what kind of debt it is, what your financial goals are, and whether they are short- or long-term. As these factors change over time, so too should your savings strategy. For instance, if you have short-term debt, you probably should pay it down first, then shift your focus to investing later, when you’re unencumbered by high interest. It’s important to remember that investing is a dynamic process, just as we found budgeting and goal-setting to be in part one of this guide.
Many people think they are doing the right thing by paying the minimum on their debt so they can maximize their savings. What they may not realize is debt and savings are both part of the same financial equation. In fact, you can think of debt as ‘negative savings.’ If you can avoid incurring interest by paying down debt more quickly, it’s the same to your bottom line as having earned that interest from your savings. In short, not paying interest is the same as having earned it. When the interest rate on your debt is greater than what you can earn from your investments, you may be better off paying down your debt first — keeping in mind the tax benefits of certain kinds of investments. What you save in interest payments can then be applied to your savings, once you are debt-free.
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