Sometimes it’s hard to figure out when you should save and when you should pay down your credit card debt. You don’t want to have debt and owe money; however, you also want to make sure you have some savings built up. With the average U.S. household credit card debt standing at $15,252, many Americans are in this predicament, according to Nerd Wallet. So, what should you do? How do you determine what’s the smartest move? Here are some ways to help you prioritize paying down debt and building up savings.
1. Make sure you have a sufficient emergency account
There should be at least $1,000 in it, which you can put it in a savings account or even in your checking account if you want to protect yourself against overdraft fees, Forbes writes. Make sure you don’t touch this money unless it is an actual emergency. Also, make sure you have access to enough assets to cover at least three to six months of expenses (or more, if you’d like.) Home equity lines and credit card limits don’t count and, if you’re counting on selling investments or borrowing from your retirement plan, ensure you’ll have enough even if the market takes a turn for the worse. You can kill two birds with one stone by contributing to a Roth IRA. It allows you to save for emergencies and retirement at the same time.
2. Tackle debt with a high interest rate attached
According to Bankrate, “low interest rates on savings accounts make paying off debt first a better choice right now.” For example, if you have $10,000 in savings and are earning 2 percent, and have $10,000 in credit cart debt at a rate of 9 percent, it’s similar to putting your $10,000 in an investment that you know will lose 7 percent a year.” This is the time to focus on paying down your obligations. Forbes recommends paying off any debt with interest rates over 5 to 7 percent.