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It can be a constant battle trying to decide whether to put extra cash towards your savings or paying off debt. So when you have money left over after paying bills, where should it go?

There may not be a black and white answer, but there are a few questions you should ask to help you make a decision.

Do you have an emergency savings account?

If you don’t, this should be considered a top priority. You may not think that you need an emergency fund, but these emergencies often happen at the worst times. What would happen if your dog was in an accident and required surgery or your car broke down? Would you have the funds to cover these unexpected bills? 

Even if you only put away an extra $10-$20 a week, you could have a sufficient emergency fund saved in less than a year. Savings calculators online can help work out how much you need to put away to save a certain amount.

How much is your debt costing you?

Even if you don’t have that much owing in debt, if you are only making the minimum repayments, you could be paying a lot in interest. 

Sit down and figure out how much you are paying in interest each year and if it is significantly eating away at your funds, it is worth making paying off your debt a high priority. 

How much would your savings earn you?

Similar to the previous question, you also need to sit down and work out how much money you are saving through investing or a savings account. 

You may find that it would be worth putting extra funds into your savings or investing in order to receive more income and then you could use this extra money to pay off your debt.

What are your financial goals?

These goals may determine whether saving or paying off debt is a higher priority. For example, you may want to buy your first home or investment property in the next few years. Both saving for a deposit and paying down debt can help you here. The deposit for a property is a large amount so this may be your priority. Make sure you have a plan for your smaller high interest debt though and put funds towards paying it off as it could impact how much you can lend.

What will be your expected income over the next few years?

If you are struggling to both save money and pay off your debt at the same time, look at your financial situation for the next couple of years. Are you expecting to be promoted? Will you be receiving a pay rise? 

You may even want to consider researching other jobs that are available to see if you can get a higher income, this way you can have greater flexibility when it comes to saving and repaying your bills. 

Potentially it is not one or the other. The key is making a conscious decision about your debt and your savings. These questions above may not always have simple answers, but they can help steer you on the right track. 

Will your personal situation be changing?

Think about your personal situation and what you want to do and would like to achieve over the next few years. For example, if you are a young couple looking to start a family, you may want to pay down your debt as much as possible before children take the priority. Planning financially for children is really important and can reduce stress after they arrive.

Do you want to buy your own home or travel or invest to start building your nest egg? You may be approaching retirement and would like to payout all debt and maximise savings  so that you can enjoy a comfortable retirement.

If  your personal circumstances will change or you have specific goals to achieve, you need to think about how your finances will be affected and implement a plan of action. 

How many credit cards or loans do you have?

If you have several credit cards which all have money owing, plus a car or personal loan, it can be difficult to juggle repayments on multiple debts. If you are struggling to meet the minimum repayments then it is definitely time to prioritise paying them off and reducing number of debts. If you are just making the minimum repayments on credit cards and personal loans, you may be paying a lot in interest. Calculate how much the interest is costing you as motivation.

If you have multiple credit cards, work on paying each credit card off completely. Then consider cancelling them to remove the temptation. When applying for loans like home loans, credit card limits are factored in whether you owe anything or not. By minimising the number of cards and limits you may improve your credit profile with lenders in the future.

Do you have a budget?

This can be the easiest way to work out how much you have to put towards your savings or debt and will also show you where you are spending unnecessary money. 

Write down everything that you spend money on from petrol to groceries to every coffee you buy for a week or a month. If you find that you are spending more than you earn then now is the time to start slashing. By cutting down your expenses, you may find that you have enough spare money to put towards both your savings and paying off debt at the same time.