What’s Holding You Back From Financial Freedom? Vol 6: Indecision – Save Money or Pay Down Debt

What’s Holding You Back From Financial Freedom
Vol 6: Indecision – Save Money or Pay Down Debt

Part 6 in Vicki Arndt’s series exploring the relationship between wealth and beliefs. In this article, Vicki discusses the common burning question: Is it better to save money or pay down debt?

One of the most disabling financial concerns for working people is how to pay off debts while also putting money aside for the future. What is the best strategy when you know you need to save, but you have debt to pay down? This is a common, difficult spot for most of us. The first thing I’d tell you is: you are not alone. Often, when we find ourselves in this situation, we feel pressure and shame – pressure to pay down the debt and shame that it happened in the first place. This powerful combination of forces can make us feel inadequate and incapable of moving forward.

I don’t see it that way. Life is not an all-or-nothing proposition.

Life, including our financial conditions, is a continuum. As I often tell my children, life is not a straight line. Just because you are struggling to find your way now doesn’t mean you are destined to feel lost always. I love that saying, “No storm lasts forever,” because it’s the truth.

The biggest problem with debt is that it keeps you from moving forward. You find yourself looking in the rear view mirror wishing you’d made different choices or had better luck. Feeling the pull of the past makes looking toward the future almost impossible. But is it really?

As I said, life is not an all or nothing proposition. There are ways to pay down debt and save at the same time, although doing it well may require you to make some sacrifices. But I find that there is always a reasonable solution to the circumstances that trouble us most.

Let’s talk about debt.

There are different types of debt. I never worry about a mortgage (as long as the payment is affordable). In fact, mortgage interest is the only debt that has a tax benefit. That said, even a car loan or lease can carry financial advantages, depending upon the situation. Where things go wrong is with credit card debt and home equity lines of credit (HELOC).

If a client with limited income comes to me with high credit card debt or a large balance on a home equity credit line, the first question I ask is: What did you buy and when did you buy it? The answer to these two questions gives both you and me tremendous insight. Often, spending is like overeating. We do it without thinking about the consequences, then feel tremendous shame when we realize the outcome of our actions. When we have the courage to ask ourselves the “what/why” questions, it is like looking into a mirror or stepping on the scale. The first step to moving forward is to be fully present right where we are and to be honest with ourselves.

For example, if I purchase a “must have” item with a credit card knowing full well I won’t have the means to pay it off 30 days from now, I set myself up for a feeling of shame or dread when the bill comes due. What was so important about that item and why did I need it so badly? Why was I willing to sacrifice my financial peace of mind and create stress in my life? Honest answers to this type of question can be enlightening and create real change which honors you.

Once we are clear on the what/when, the next step is to make a firm commitment to stop doing what is creating the problem, when we decide that taking on debt isn’t worth the cost. Cutting up credit cards, going to a cash payment system, renegotiating or refinancing debt, are all possible actions that will begin to turn you toward your own power to be financially secure. Next, evaluate your cash flow – how much money do you have coming in and what amount of money do you spend a monthly basis? If you spend more than you earn, credit card debt will follow. If instead, you have extra money after paying bills each month, this discretionary income can be captured and invested for your future.

Saving – while paying down debt

I have always encouraged paying down debt and saving at the same time. Since debt feels so defeating, it is often my recommendation to put the lion’s share of your discretionary income toward debt, while also sending some to your savings. Why is this important? Saving makes us feel good. When we check our bank accounts and see that we have money set aside for emergencies, it gives us peace of mind. An emergency fund also relieves the pressure of turning to credit cards when the unexpected happens. Watching our debt fall can also be satisfying, but it doesn’t really give us peace of mind until it is completely paid off.

Is it possible to save too much?

Over-saving can be as debilitating as over-spending. But in our society, over-saving is rarely discussed, while over-spending is a common topic everywhere from articles to casual conversation. People who always wait for a “deal” before they’ll make a purchase, or who don’t give themselves permission to spend when they have funds available, may experience the same effect on their psyches as being riddled with debt. The money you worked so hard to earn should bring you joy and pleasure.

How does anyone become financially secure?

If you make $500,000 per year and spend every dime and more, you will be in the same position as those who earn $50,000 and spend every dime and more.

Financial security happens through an effective balance of saving and spending. Living a lifestyle you can easily sustain is a key component to relieving money stress. And honoring yourself with your money habits is an act of self-love.

You can do it. It’s totally possible. You are worth it.

Would you like to make a plan for reaching your combined goals of saving and paying down debt? Make an appointment. We’d love to help you make that happen.

With you at every stage,

Vicki Arndt
Founder & Senior Investment Advisor

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