Use a Balanced Approach: Pay Debt and Set Aside Small Savings
Instead of focusing on either eliminating your debt or rebuilding your savings, depending on your financial situation you could consider a balanced approach that would allow you to pay debt while building a small reserve for financial emergencies.
After you’ve created a budget and set your financial priorities, determine whether you have enough savings to get you through a financial emergency, such as an illness or a job loss. Track your expenses for a month so you can get a picture of how much you’ll need for groceries, clothing, entertainment and other fixed and variable costs. If you have enough saved up to cover about three months worth of these costs, you’re in good financial shape and you can focus on how to pay off debt.
If you don’t have enough emergency savings, you can still have the best of both worlds. After accounting for your fixed and personal expenses, you can divide your take-home pay and any extra money you receive, like a tax refund, between saving and paying down your debt. This allows you to repay what owe in a steady, systematic way, while at the same building up a small savings fund. Once you’ve saved up enough in your emergency fund, you can focus on blasting through your debt.
Although it will take a bit longer to pay off your debts and for your savings to grow, in the end you will have achieved both of your financial goals. And, you can always increase your debt payments once you’ve saved up a reasonable nest egg to cover the cost of any emergencies you may encounter.
No matter which route you take, it’s important to evaluate your personal financial goals and decide which is more important. As with all things in life, deciding whether you should pay off debt or save is all about balance.