In Focus – SCCCU Blog

There are only so many dollars to go around, and it’s not always clear if you should pay off debt or save for tomorrow. On the one hand, paying off debt means freeing yourself from the burden of interest payments that eat into your monthly income. Conversely, saving for the future means building a safety net and setting yourself up for financial security. The good news is that you don’t have to choose one over the other. Even with limited funds, it’s still possible to strike a balance without feeling like you’re falling behind on everything.

The first step is to get a clear picture of the debt you’re dealing with. Not all debt is created equal.

• Good debt includes loans that contribute to your future financial success, like mortgages or student loans. These typically come with lower interest rates and can help you build wealth over time.
• Bad debt includes high-interest debt like credit card balances, payday loans, or other consumer debt that doesn’t build long-term value and can spiral quickly.

If you’re juggling both kinds of debt, your priority should be paying down the bad debt, which quickly wastes your hard-earned cash to pay interest charges that could otherwise go into your savings.

Start by listing all your debts, including the balances, interest rates, and minimum monthly payments, which will give you a clear view of which debts to prioritize paying down first. While prioritizing your high-interest debt, you’ll need to build a safety net to ensure you don’t rely on credit cards again should a financial emergency arise. This is where an emergency fund comes in. Think of your emergency fund as your first step in building savings and your financial security blanket. Don’t feel pressure to have thousands stashed immediately — start by setting aside a small amount each month, and know that every dollar counts.

Prioritizing other forms of saving depends on your interest rates compared to your savings returns. When you are paying off a debt, the return on your money is equal to the interest rate you’re paying (minus any tax deductions). So, the math move that can help guide you is to compare the interest rates on your debts with the returns on your savings. For example, if you’re carrying credit card debt at 20% interest, it doesn’t make sense to prioritize savings in a bank account earning just 4%. In a scenario like that, you’re better off putting your extra cash toward paying down the high-interest debt. On the flip side, if you’re getting an employer match on retirement contributions at a rate of 50 cents for every $1 you kick in, that’s a 50% return on your money. So, grabbing those matching funds goes higher on the scale of priorities than even those high-rate credit card debts and emergency funds.

A budget can help guide your priorities. You'll then know how much you can put toward your monthly goals. The important thing isn’t the type of budget you choose; instead, it’s sticking to one that helps you reach your goals. If you'd like assistance setting up a realistic budget, schedule a time to talk to one of our Certified Financial Counselors at 831-425-7708.

While throwing every spare dollar toward debt repayment might be tempting, you don’t want to neglect your savings completely. For example, if you have high-interest debt, you might allocate 70% of your financial goals money toward debt repayment and 30% toward building savings. Or, if your debt is manageable, you could do a 50/50 split. The exact ratio is up to you.

Remember that balance is key. Think of it like this: every dollar you save today is a step toward financial security, while every dollar you use to pay off high-interest debt is a step toward financial freedom. Celebrate your wins along the way — no matter how small they seem. Progress builds momentum, and acknowledging your achievements can keep you motivated to stay on track.