Budgeting trade-offs: More Cash or Paying off Balances?

Budgeting trade-offs: More Cash or Paying off Balances?
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As I mentioned in my last blog, for the next few postings, I will focus my writing an umbrella topic called, the Budgeting Trade-off Series.’ The inspiration for this series, of course can be credited to the ongoing goal I have of working towards refining our budget and setting priorities that will make us more efficient in these efforts.

The topic today is Having Extra Cash versus Paying off Balances monthly – which is the better option? While you may already be leaning towards one side of this scenario – it is always a good plan to look at both situations closely and go from there. That is what we plan to do!

Plan A: Save Money

First off, if you look at this first situation from a credit history perspective, it does look good to have money saved in the bank each month. This is because, when applying for additional credit, a mortgage, a car loan, or whatever the case may be – lenders will take into account when determining whether you are ‘credit-worthy’, the fact that you appear to have access to saved funds and your credit score will also be stronger.

It is also a good idea to set aside money each month to have in case you need to access the funds for emergency purposes. Whether you need to buy a new washing machine, pay for car repairs or require expensive medical treatment – being able to save extra money each month is a definite bonus. Sometimes, just putting money into a savings account that will be used for more long term expenses, will also be necessary and another valid reason for choosing to save instead of pay off bills each month and leaving your accounts with a lower balance.

Plan B: Pay off Debt

As a sign of the times, it is fair to assume that many people carry around a relatively high level of debt from year to year. Whether it be in the form of student loans, mortgages or credit card bills – the volume of debt we accumulated can weigh us down in more ways than one.

Not only does the stress of debt loom over us, but it also greatly impacts our financial situations. From this perspective – having debts that go unpaid can also contribute to a poor credit score. So, once again if we want to be able to access future loans, remaining within a good credit rating domain is crucial.

In addition, having too much debt can make it that much more challenging to keep on top of loan payments, as well as having too large of an owing balance – these are the types of actions that follow us around via a negative credit history. As you can see, this is where the event of paying down debt should maybe also be a top priority.

Another important reason why paying off debt balance each month is a plus is closely linked to the issue of interest rates. With the amount of interest attached to many of our multiple credit accounts, a great deal of our payments each month go to these interest charges. By paying off the full amount of your debts – at least for some of the accounts you own- you can save some money. This can reduce your stress levels and make you breathe a sigh of relief.

Overall, you could also even save more money on interest payments than what you will save each month if you choose to go with Plan A and save instead of pay off debts. This exact amount of course will need to be determined. Comparing how much you will save within the confines of each approach, could be a great way to figure out which options will actually allow you save more money each month and which trade-off you might want to make.

With this said, I feel the best course of action for us is to continue to pay off our debts as opposed to saving some extra money each month. WIth the above logic resounding in my head – I do agree that we have the potential to still save money – by paying off our bills in full each month and saving on large interest charges alone. For me, for now this is the trade off basket that I am choosing to put all of my eggs into.

 

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