In times of uncertainty, choosing to save extra cash or pay off debt can be more complicated. Here’s what to consider.
As we recover and seek stability in an uncertain post-COVID-19 world, many Americans are taking a closer look at their financial health — particularly their emergency savings. A recent survey conducted by Regions Bank* found that a quarter of Americans would have difficulty covering one month’s worth of expenses with their current savings.
If you’ve just received a chunk of money — a bonus, tax refund, or stimulus check — you may be wondering whether you should use it to pay down debt or save the funds for a rainy day. During times of economic uncertainty, it’s important to carefully consider a few factors before deciding how to best use extra cash.
Should I pay off debt or save?
Prioritizing paying off high-interest debt with extra cash has long been standard advice from financial gurus. The reasoning behind this makes sense — you’ll ultimately save more by paying down high-interest debt, reducing the total interest you pay in the long-run. While this is still solid advice, during times of economic uncertainty, it’s a good idea to first consider how secure your finances are before applying extra cash to existing debt.
Is your ability to cover your expenses at risk?
If the answer is “yes” or even “maybe”, you should aim to save any cash you can in an emergency fund rather than aggressively pay down debt. Make the minimum payments on your balances on-time to minimize the effect on your credit score and keep the cash accessible. If the worst does happen and you wind up losing a source of income, the money you’ve stashed away can help cover expenses until you’re able to regain your footing. Without that buffer, you could potentially find yourself unable to pay some bills, which could ultimately cause you to fall deeper into debt.
Are you currently financially stable?
If you are fortunate enough to be in a financially secure position with emergency savings in place, then using extra cash to pay down high-interest debt is still a solid strategy. And even if you are in a less secure position, there may be opportunities to manage debt while saving what you can. For example, you might consider saving half of your tax refund or stimulus check and using the remainder to pay off some debt.
Other tactics for reducing high-interest debt
If your credit is in good shape, you may have other options for reducing high-interest debt. Look at the rates on your debts and see if you have any opportunities to reduce your interest. One option might be to transfer your credit card balance to a credit card with a lower interest rate. Or, you might consider using debt consolidationto help secure a lower interest rate and reduce your monthly payments. Before making a decision, use our balance transfer calculatoror debt consolidation calculatorto plug the numbers and determine which option is best for your unique situation.
Ultimately, everyone needs to have savings for an emergency. While reducing debt seems like a conservative strategy when you are unsure about your financial security, it can be safer to keep some of that cash on-hand. And in the best case, if you reach a secure spot without having to dip into those funds, you will still be able to use them to pay down debt.
For tips, calculators, worksheets, and educational resources designed to help you make smarter financial decisions, visit Regions Next Step.
*The Financially Fit Family omnibus survey questions were part of a national online survey that took place between April 1 – 5, 2020. It reached N=2,000 US adults, and the results are weighted and are representative of all US adults (aged 18+).
As a financial expert with a background in economics and personal finance, I've spent years delving into the intricacies of managing money, especially in times of economic uncertainty. My expertise is grounded in a combination of academic knowledge and real-world experience, having advised individuals and families on financial strategies tailored to their unique circ*mstances.
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Financial Health Assessment: The article emphasizes the importance of evaluating one's financial health, especially in the context of the post-COVID-19 world. This involves a close examination of emergency savings, which is validated by the Regions Bank survey. I'm well-versed in interpreting financial health indicators and recognizing the significance of emergency funds in uncertain times.
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Debt vs. Savings Dilemma: The central question posed is whether to use a windfall (bonus, tax refund, or stimulus check) to pay off debt or to bolster savings. The traditional advice of paying down high-interest debt for long-term savings is acknowledged. However, the article introduces a nuanced approach, considering economic uncertainty. I can speak to the intricacies of this decision-making process, weighing the benefits of debt reduction against the security provided by having cash reserves.
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Prioritizing Emergency Savings: The article suggests that if one's ability to cover expenses is at risk, prioritizing the creation of an emergency fund may be prudent. I can elaborate on the importance of having a financial safety net and the potential consequences of neglecting this aspect, especially in the face of unexpected income disruptions.
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Financial Stability and Debt Management: The article differentiates between those who are financially stable and those facing more precarious situations. It advises those in stable positions to prioritize debt repayment but also acknowledges the possibility of managing debt while saving. I can provide insights into strategies for balancing debt reduction and savings, tailoring recommendations to an individual's financial stability.
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Options for Debt Reduction: The article explores alternatives for reducing high-interest debt, such as transferring credit card balances or debt consolidation. I can elaborate on these strategies, considering factors like credit score, interest rates, and individual financial goals. Additionally, I can discuss the use of financial tools like balance transfer calculators and debt consolidation calculators to inform decision-making.
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In conclusion, my in-depth understanding of financial principles, coupled with practical experience, positions me to provide comprehensive insights into the considerations outlined in the article.
