It seems that the cold has arrived and summer is far, right? What is not far away is the end of the year, an ideal time to take stock of the year and prepare to face the next in the best possible way. Are you preparing your financial purposes for 2019?
Today I want to share with you a question that I received last week following the article “How to pay a debt” .
It’s a question asked by a blog reader, Carlos, and I find it very interesting because it shows that not always paying a debt is the best option and sometimes it is better to focus on saving .
Why sometimes it is better to save than to pay your debts
Carlos’s situation is as follows:
“My girlfriend and I finished studies a couple of years ago and started working. We still have some loans from our student days due to some master’s degrees we did.
In total, the debt of the two is € 14,000, in a 5% loan. Luckily we both have work and we can gradually end the debt so it is not a short-term concern. ”
Carlos keeps giving me information about his situation and now the important thing comes:
“We want to get married in a couple of years so we want to save for the wedding and I want to buy a car since I need it to go to work and for now I am using one of my parents but I don’t think it lasts much longer since it has a few years. “
And the concrete question:
“I am doubting whether to focus only on eliminating the loan, paying it off month by month but focusing on saving for the wedding or the car or something in between. What would you do?”
Having debts that you can pay without problems at least in the short or medium term and at the same time having savings goals is very common for many people.
The two expenses that Carlos will have in the coming years are large disbursements that are likely to unbalance his financial situation quite a bit. Or you check your finances important to devote money to the wedding and the car or, more likely, ask for an additional loan to meet those expenses.
In addition, with the detriment that a loan for a car or for a wedding are credits that have higher interest rates than a student loan, the type of credit Carlos already has.
Therefore, my first recommendation is that you focus on saving for the wedding and the car .
Make the minimum loan payments and start saving seriously for your savings goals
I think it is the best option because the credit debt for studies has a low interest rate. Especially lower than it would have a loan for the purchase of the car or the wedding.
So it is a perfectly manageable debt that does not put Carlos’s financial situation in serious danger.
So the main objective is:
- Avoid borrowing to buy the car or the wedding.
- Or at least, having saved as much money as possible so that the loan is as small as possible.
Another very important point that should not be forgotten is that the money that Carlos is saving month by month for the car and the wedding can accumulate it in a savings account or a fixed-term deposit and thus obtain an extra return.
This will make you have more money to make the initial payment of the car so that the possible credit you have to ask for is lower in quantity and with a lower interest rate. The same would happen with the wedding.
It seems much more effective for Carlos’s personal economy to do this, than not to focus on ending the loan for low-interest studies and then borrowing more due to the purchase of the car and the payment of the wedding.
Without a doubt, you have to take the risk that Carlos is having a debt. It is possible that Carlos or his girlfriend lose their job or have a reduction in salary or any other high unforeseen expenses that make it difficult for them to pay the debt.
It is obvious that the method that I advise Carlos has its risks . That is why Carlos must know at all times the job stability that both he and his girlfriend have or the chances of a strong unforeseen expense that unbalances their budget.
Part of this risk is eliminated with the creation of an emergency fund so it should be a savings objective, if you do not already have an emergency fund created.
The truth is that the above does not seem the most complicated for Carlos. But having enough willpower to constantly save for the car and the wedding and not spend money on frivolous things.
However, Carlos has such doubts about his personal finances makes me think that he is a person aware of the importance of caring for and managing money, so I think he understands the importance of following this plan.
As you see, not always paying your debts is the most important thing. Sometimes it is better to save to avoid larger ones and with higher interest rates.