Being weighed down by hefty monthly payments from student loans, credit cards and other unsecured debt can take a toll on you both financially and emotionally. It can be tempting to start paying off your debts early as you start building up your savings; many financial gurus out there will even advise that you do this. Personally, I think it is quite foolish to take this advice, here’s why:
- You are One Event Away from Financial Disaster – if you are applying all of your extra cash towards your credit card debt or student loan debt, you are setting yourself up for a potential financial disaster. What would you do if you lost your job, your car needed a major repair, or you had a large medical expense? If any of these events occur and you do not have cash reserves, your credit score could be dinged significantly, and interest on your debts could balloon if you can’t make at least the minimum payments.
- Mental Health – there was a study released by Northwestern Mutual Insurance Company that linked happiness to savings. The study found that people who planned for the future were happier than those failed to do so. Wouldn’t you be less stressed if you knew you were able to pay your bills for 6, 9 or 12 months if you lost your job? In my experience, this is exactly the case. I sleep very well knowing I have 18 months of my expenses covered should my income dry up.
- Being Independent – I get a great sense of satisfaction knowing I am not dependent on anybody else when it comes to financial matters. If (and when) an unexpected financial loss occurs, having a lack of savings will make you dependent on your parents, your siblings, your friends, or worse…the government. Considering that a significant amount of satisfaction and happiness has been strongly linked to self-reliance, building your savings should be your first priority.
All this being said, paying off your (bad) debts as quickly as possible should be a high priority of yours. Just make sure you have a substantial amount of savings before you start chipping away at your debts. Not sure how much to keep in reserves? Follow my future blog posts to read my recommendations!