Finding the Freedom to Form Your Nest Egg When Your Nest is Full of Debt

The following is a guest post about debt. If interested in submitting a guest post please read my guest post policy and then contact me.

It’s often said that the goal of successful personal finance management is achieved by spending less and saving more. That makes sense, but which comes first? If you have a set number of dollars to allocate each month, it’s challenging to decide whether you should first pay down existing debt or focus on building your personal savings. The advice given by many financial advisors today directs consumers to pay down debt before they ever think of trying to set aside money for savings, but that’s easy to say when you are living on a financial advisor’s salary.

So, for the average American, which comes first: freedom from debt, or a nest egg?

First, it’s important to point out that while freedom from debt may save you from paying mountains of interest, an “emergency fund” savings account could save you from total financial ruin. This is especially true in cases where you would go back and borrow against those revolving accounts again if you ever found yourself in a financial emergency. However, it is difficult to convince anyone to focus strictly on saving when these accounts are currently earning so little (at best, 2%) and revolving credit accounts are charging so much (in the neighborhood of 30%). There are advantages and disadvantages to either approach, so every person has to evaluate his/her own situation and decide what is best.
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Like most things in life, the best case scenario is that you find a way to evenly balance the two. If you are able to divide disposable income between saving and paying off debt, you’re likely to feel better about the process and be able to stick with the plan you have made for yourself. You will see slow and steady progress on the repayment of debt while simultaneously providing a cushion for yourself. This is also a great way to develop healthier financial habits. Once the debt has been repaid, you will have more money to spend on luxuries or be able to contribute more to your savings.

The amount of money you allocate for each should be based on your own priorities and individual features of your revolving debt. For example, revolving accounts with higher interest rates should be given higher priority in your overall debt repayment plan. Also, you should take advantage of any opportunity to consolidate debt into a single account that offers a lower rate.

Set measurable goals for yourself, but try to not dwell on progress too much. As the saying goes, “a watched pot never boils”. Don’t stare at your account balances each week and get discouraged. It’s best to stick to your plan, and check back for progress after a few months. You’ll be surprised at the difference you can make in a short amount of time.

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About the author: Marissa Kasarov studied Marketing and Management at City Colleges of Chicago and Project Management at Northwestern University. She is currently enrolled at Columbia College, studying Business Administration, and works as a business manager in the veterinary industry. Marissa is a staff writer for CollegeFocus, a website dedicated to helping students deal with the challenges of college, including housing, finance, style, health, relationships, and transferring from a community college to a four-year university. You can follow CollegeFocus on Twitter and Facebook.

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