Welcome back to the reflection section of GB 123! You spent the bulk of the last assignment learning about emergency funds and the kinds of things you might consider when deciding how much to leave available in your emergency fund if you plan to use some for paying down debt.
In today’s assignment, you’ll reflect on the concept of trade-offs. More specifically, the paying down debt vs. saving up.
To remind you where you are on your debt journey, take a look at the chart below.
When Karisa reflected on the uncertainty she felt when first considering paying down debt, she said,
“When it comes to saving up or paying down debt, it’s always been difficult for me to know which is the best option.”
You may have had similar questions!
On the one hand, if you’ve got room in your budget, using those extra dollars to more quickly pay down debt might make more sense than building up a larger cushion. This is particularly true if you know you can pivot quickly in case things don’t go to plan — for example, if you have a stable job and could downsize your expenses by moving in with family, or if you already have a sizable emergency fund to fall back on.
On the other hand, growing a large cushion can shield you from the possibility of taking on more debt down the road.
In addition, paying down debt now might end up saving you money in the long run. But if the interest rate you’re paying on your debt is lower than the rate you’re earning on your savings or investments, paying off your debt might not be as urgent.
In Karisa’s case, since she already had some savings stashed aside that she could fall back on, she decided to tackle her debt first. And she knew that once she paid down her debt, she’d be able to save up even more quickly for other things that were more important to her.
Since you’re here, you probably made the same decision to tackle debt first rather than save up. But it never hurts to reevaluate what makes sense, just in case.
Now we want to hear from you! Are there other financial trade-offs you had to make to start your debt journey? What things did you consider when you started paying down debt? Leave a comment and let us know!