As a general rule you if the money you save has a higher return rate than debt, you should save money; and if the interest of your debt is higher, you should start paying off debt.
Usually one does not have only one type of debt but different such as credit card debt, mortgages, student debt, car loans. Credit card debt is normally the most expensive one with interest rates averaging almost 20% for the United States. On the other side, auto loans or mortgage rates are lower, currently, the ARP for a 30 year fixed mortgage is 3%.
Save up or pay off?
Knowing this, the first step is going to be to make a review of everything you owe, how much you owe in total, and the interest rate for each. Then, you can start to prioritize.
As for savings, according to value penguin, the average bank interest rate for interest checking accounts in the United States is 0.03%. Meanwhile, the average savings account rate is currently 0.06%, and the average money market account interest rate is 0.09%. For Certificates of Deposit, the rate can go up to 1%.
What about investing?
As you can see it is better to pay off debt than just to save money. Investing can be a different story.
The SPDR S&P 500 ETF (SPY) has generated an average three-year return of 13.25% and based on 10-year data, the fund generated average annual returns of 13.55% the Dow Jones Industrial Average has returned an average of 15.03% annually for the past 10 years.
The thing about investments is that they can be volatile an index fund might be up 10% this year but down 10% next year. While there are investments that pay a guaranteed interest rate, such as bank certificates of deposit (CDs) and U.S. Treasury bills or other corporate bonds, they tend to have low rates of return that rarely exceed the interest rates charged by credit cards and other lenders.
Ultimately we could say that it is generally better to pay credit card debt because as you can see, the interest in this is a lot higher than average annual returns for stock market indexes after this carefully analyze options and the best thing is to do both, allocate a portion of extra cash to pay debt and also start investing at the same time that you are paying your low-interest debt.
Every situation is different
Each person should carefully understand their financial position to decide what to do with any extra cash. You must go through options to analyze your types of debt and your possible investments.
