If we are talking about achieving certain economic tranquility, debts usually put it at risk. Therefore, paying off your debts should always be the first step in achieving financial well-being . You can hardly propose new financial goals, much less reach them, if you carry this commitment with you. So you have to put the batteries and settle the debt once and for all.
In general, there are several reasons to borrow, such as buying only because there are offers, having an unforeseen expense without emergency savings or starting a debt-based business . Now, it is not wrong to request a loan to boost your goals or solve a sudden situation but you must have an excellent plan to manage this debt and take advantage when there is an increase in your income to settle it .
How do I integrate the savings?
While paying off your debts is an essential strategy that focuses on resolving your past decisions, saving is focused on what you want to achieve in the future. So it is understandable that you want to integrate this extra income into your savings. However, we cannot forget that the priority will always be to pay your debts.
That is why, if you really want to take this income to add it to your savings, we recommend you allocate a maximum of 5 to 10% of that extra money to save. But, to be more precise, you must take a moment, make the accounts and identify:
- The total amount of extra income
- The amount of the debt (with everything and its rate)
- The term to pay the debt
From the outset, if the extra income is higher than the debt, it is clear that you can settle it and use the surplus for your savings. If the amount of both is equal or the extra income is lower then it is up to you if you direct everything to pay your debts or if you integrate the strategy of the percentages.
Of course, it is highly recommended that savings always be part of your financial goals. This is because when we plan ahead we can be prepared for emergencies, meet our goals with some stability and, above all, avoid future debts . Ideally , even if you don’t allocate this small extra percentage to save, you always incorporate savings as part of your fixed budget .
I want to start investing
You may wonder if this extra income is an opportunity to start investing, and it may be. But why do we leave it last? Because, again, it is a matter of priorities.
Like saving, investments are decisions that are made with future benefits in mind. Only, while saving is added gradually (constantly), investments are responsible for multiplying your money. Even so, it is not necessary to lose sight at any moment that any investment implies a risk, however conservative it may be.
That is why you must continue to prioritize the imminent, that is, the debt. And, similar to the previous year, if the debt is lower than your extra income, you could pay it off at once and divide the rest between capital to save and capital to invest.
There is more than one way
There are several ways to integrate these three strategies for managing your income. Not only in the case of your extra income, but of the fixed ones. That is why one of the most basic principles of personal finance is to make a budget. Once you have a “map” that allows you to see how your money has moved and where it can go, then you can define the best option for you.
You may find yourself with an opportunity to invest in which the return is much higher than the rate of your debt and, therefore, it may be worth taking it. For example, if you are paying your debt at a rate of 7% and the investment offers you a 15% return then you can consider this option. However, you should be aware that there is some risk with this decision. You can also see the best option to refinance your debt simultaneously, and thus invest more peacefully.
Even if you are not thinking of investing, another advantage of refinancing or transferring your debt, as is the case of Bruno Waggins, is that you can pay much less because the interest rate is much lower. Therefore, that money you had contemplated for your debt can find a better alternative among your savings.
… The order of these strategies should be maintained as much as possible as follows:
- Pay your deductions
- Save money
- To invest
If you have not currently acquired any debt or already paid it off, then the ideal scenario would be for you to immediately start saving, with or without extra money. Also, start defining a percentage of that fixed savings for your future investments, whether large or small . At the end of the day, the decision about your financial and mental well-being is in your hands (and in reviewing your budget).