Personal Finance,  Wealth Building

Saving Money or Paying Off Debt: What’s the best decision during a Recession?

saving money or paying off debt

Are you trying to figure out whether you should be saving money or paying off debt during a recession? If so, this article is going to help you figure out which would be your best option.

During economic downturns, it is easy to get confused about what you should do with any extra cash you have. Many people in the US are now receiving stimulus checks and they are trying to figure out what’s the next move, after they have taken care of all the necessities. Should they be saving money or paying off debt? Americans have enormous amounts of personal debt, so maybe it would be beneficial to get rid of some of it?… Right? If you are not in the US, and you’ve managed to get your hands on some extra cash through your government programs, this may apply to you as well. 

With most financial advice, there isn’t a one size fits all because your life and financial scenario may be different from someone else’s. However, there are two scenarios that I believe are worth mentioning and I’ve outlined them below.  

1. You have an emergency fund. 

I always recommend to my clients, at minimum, to have enough liquid cash for three months worth of expenses. The amount you have in your emergency fund will depend on many factors. Some of my clients prefer to have twelve months worth of emergency funds. It’s completely up to you on how much money you need to have liquid in order to feel secure.

In this scenario, where you have established an emergency fund, it would be better to pay off a chunk of those high interest credit cards. Paying less in interest to the credit card company would allow you to save more money every month.

2. You don’t have an emergency fund. 

In this scenario, I would recommend holding onto as much of your extra dollars as you can until you have saved at least three months worth of cash for your expenses.

I want to be clear! I am not recommending that you don’t pay off your credit card debt. You should always make the minimum payments every month in any case. However, keep in mind that credit card companies will always protect themselves. One way in which they do this is by lowering your credit limit during uncertain economic times. There is a chance that they may lower your limit as you pay off large amounts of debt. This will  prevent you from having access to the money you just used to pay down your debt. Bummer…I know it’s happened to me and it sucks! Always remember, the credit card companies make the rules when it comes to the credit they allow you to use, not you.

I know you may not like seeing debt and you’re probably thinking I could eliminate it all with all the money from the stimulus! I get it. However, during a recession, you want to make sure that you have access to your money at all times in case you need it. So instead of putting it all on your credit card, protect yourself by putting it into a checking or savings account. You now have more control over your money. Having access to your cash if you need it, will give you peace of mind during uncertain times like we are experiencing today. 

I hope that this article gave you food for thought when you are making a decision on whether or not you should be saving money or paying off debt during a recession. For more articles visit our blog .