Choosing between paying down debt vs. saving is a common question we face regularly. How do you choose? Are you making the right decision? Later, I'll show you an example, but in short the answer may be both.
Our lives change, our goals change, our income and debts change, so the decision to save or pay down debt could also change. Sometimes there is an emphasis on savings and at times paying down debt may be the better choice, but knowing which to do can make a large impact.
Let's explore an example:
Samantha has a student loan balance of $35,000 with a 6% interest rate and a 10 year loan period. The monthly payment is $390, but she is currently paying an extra $110 per month, totaling $500 per month.
The extra payment of $110 per month will save her $10,594 in interest and shorten the loan by 1.80 years.
If Samantha continued to pay her student loan at the minimum payment amount AND use the extra amount she was paying on that loan to contribute to her 401(k), Samantha would accumulate $16,267, resulting in a net savings of $5,673 ($16,267-$10,594)!
More importantly, after her loan is paid off after 10 years, she would have accumulated retirement savings vs. paying off the loan a little early and have nothing to show for her retirement. The amount of the extra payment being used for savings outweighs, on multiple levels, the minor benefit of paying off her loan early in this case.
Of course every situation is different and there could be other solutions to the above example but it does warrant careful thought and consideration when deciding to pay down debt or save.