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Save, Invest or Reduce Debt? That is the Question

By manybanking.com Staff
In today’s tough economic environment, one of the most common questions consumers have is, “Should I save my money, invest it or pay off my debt?” As with personal finance in general, it’s a fairly simple question, with a far from simple answer -- “It depends.”

Category Product: 
Savings
Category Finance: 
Personal Finance
Keywords: 
Savings, Financial Matters, Finances, Emergency Savings, Emergency Fund, Job Loss, Unemployment, Debt, Reducing Debt, Credit Card
Introduction: 

By manybanking.com Staff
In today’s tough economic environment, one of the most common questions consumers have is, “Should I save my money, invest it or pay off my debt?” As with personal finance in general, it’s a fairly simple question, with a far from simple answer -- “It depends.”

The deep dive of the stock market means stocks are virtually on sale. Consequently, investors with a long time horizon of 20 or 30 years, have the potential to reap big rewards in the future by investing now. Because stock prices are down, investors will get more shares for their money. If and when stock prices rebound, that will equal more profit for those who bought low.

On the other hand, many people are finding that they do not have enough emergency savings to cover them through the tough times. Unemployment has already reached record levels and continues to climb. Most experts agree that you need to have at least three to six months worth of expenses saved up in case you lose your job or face an unexpected event.

In addition, some of this current economic crisis was caused by a massive increase in the amount of debt the average consumer carries. The easy availability of high-interest credit made it possible for many Americans to accumulate thousands of dollars in debt that they could not afford. Becoming debt-free is a top priority when trying to get your financial matters in order.

Look at your current financial situation. If you do not have an emergency savings, getting that started after paying your regular monthly expenses should be your first priority. This is especially true if you’ve maxed out your credit. An emergency savings fund is an insurance lifeline to protect you and your family. Stash emergency funds in a money market account or high-yield savings account. Use manybanking.com’s Bank Search tool to compare savings rates in your area.

Next, take a look at your retirement accounts. If you have a 401(k), does your employer offer matching funds? If so, you should endeavor to contribute at least enough to take full advantage of those matching funds. Otherwise, you would be missing out on a 100% return on your investment. 

A top priority should be paying of high-interest credit card debt. If you have a large amount of credit card debt, it might be wise for this to take priority over 401(k) contributions, even if your company offers matching funds. Credit card interest rates are crucial, so pay off debt with the highest rate first. When you pay off debt, it’s as if you are getting an instant return on your money of that debt’s interest rate. In this market, it can be very difficult to find an investment paying 15% to 20%, but many credit cards charge this much. Low-interest debt like mortgage debt or student loans is not a high priority.

Once you have paid off your high-interest debt and established an appropriate emergency fund, consider investing more money in your retirement funds and/or other market investments.

If you are expecting a tax refund on the horizon, that is a perfect opportunity to advance your financial goals. You don’t have to direct your refund in only one direction, however. The best strategy may be to put some in an emergency fund, and use the rest to pay off debt. Taking advantage of the low prices in the market is a good long-term strategy, but if you can’t get by in the short-term or it causes you to fall deeper into debt, it doesn’t make much sense.

—For more ways to save, spend, invest and borrow, visit MainStreet.com.

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The deep dive of the stock market means stocks are virtually on sale. Consequently, investors with a long time horizon of 20 or 30 years, have the potential to reap big rewards in the future by investing now. Because stock prices are down, investors will get more shares for their money. If and when stock prices rebound, that will equal more profit for those who bought low.

On the other hand, many people are finding that they do not have enough emergency savings to cover them through the tough times. Unemployment has already reached record levels and continues to climb. Most experts agree that you need to have at least three to six months worth of expenses saved up in case you lose your job or face an unexpected event.

In addition, some of this current economic crisis was caused by a massive increase in the amount of debt the average consumer carries. The easy availability of high-interest credit made it possible for many Americans to accumulate thousands of dollars in debt that they could not afford. Becoming debt-free is a top priority when trying to get your financial matters in order.

Look at your current financial situation. If you do not have an emergency savings, getting that started after paying your regular monthly expenses should be your first priority. This is especially true if you’ve maxed out your credit. An emergency savings fund is an insurance lifeline to protect you and your family. Stash emergency funds in a money market account or high-yield savings account. Use manybanking.com’s Bank Search tool to compare savings rates in your area.

Next, take a look at your retirement accounts. If you have a 401(k), does your employer offer matching funds? If so, you should endeavor to contribute at least enough to take full advantage of those matching funds. Otherwise, you would be missing out on a 100% return on your investment. 

A top priority should be paying of high-interest credit card debt. If you have a large amount of credit card debt, it might be wise for this to take priority over 401(k) contributions, even if your company offers matching funds. Credit card interest rates are crucial, so pay off debt with the highest rate first. When you pay off debt, it’s as if you are getting an instant return on your money of that debt’s interest rate. In this market, it can be very difficult to find an investment paying 15% to 20%, but many credit cards charge this much. Low-interest debt like mortgage debt or student loans is not a high priority.

Once you have paid off your high-interest debt and established an appropriate emergency fund, consider investing more money in your retirement funds and/or other market investments.

If you are expecting a tax refund on the horizon, that is a perfect opportunity to advance your financial goals. You don’t have to direct your refund in only one direction, however. The best strategy may be to put some in an emergency fund, and use the rest to pay off debt. Taking advantage of the low prices in the market is a good long-term strategy, but if you can’t get by in the short-term or it causes you to fall deeper into debt, it doesn’t make much sense.

—For more ways to save, spend, invest and borrow, visit MainStreet.com.

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