Should I pay down my debt or build my savings? There are many aged-old questions but this is not one of them. This is, however, a very common question for most of us in the twentieth century as consumer debt has hit a personal high and has become the ugly four-letter word.
Canadians are carrying a whopping $1.3 trillion dollars in household debt according to the Certified General Association of Canada. More than 40% of Canadians have seen their debt increase over the last three years with 21% of them saying they can no longer manage it. While Canadians struggle to makes their obligated payments, they are failing to meet additional financial requirements such as saving, which means greater vulnerability if something such as an accident, job loss or illness were to occur.
For those who have debt, conventional wisdom dictates that if you're carrying a lot of bad debt, as in debt with high interest rates, you should concentrate on paying that off first before attempting to build a savings or investments. The logic is that is does not make sense to have savings that earn less than you are paying out. The old way of thinking is that if you had an emergency fund, you wouldn't have to worry. Well, that may still be true, but now you can always charge your emergency expenses or draw on your line of credit and not be any worse off than you were, saving on the interest in the meantime.
Although high interest savings accounts are paying very little interest and most investments are still struggling to recover, it is a good 'common sense' idea to try and save for an emergency. A smart money strategy dictates that once you have enough to carry you for a reasonable amount of time you should then start putting all extra money towards high interest debt especially with many of the changes in 2010 with higher interest rates, reduced credit limits and even cancelled accounts, consumer credit could get tighter as banks are not as quick to lend money these days.
People who are relying on loans or credit cards as emergency funds could find themselves in serious trouble if those resources are suddenly unavailable. The new strategy should include money set aside just for emergencies. It is advised to save between three to six months of household expenses, as opposed to three to six months of income. If you're living below your means, you obviously won't need as much to cover you, but the more you can save, the better off you will be in the event you need it.
Many financial experts agree that as little as $1,000 to $3,000 could provide enough of a cushion if need be. If you could use some financial planning advice or help consolidating loans, private lenders are a great option. They provide bad credit loans to clients who do not feel traditional lending institutions may be an option.
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