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When rates are high, should you save money or pay off debt?

Comparing interest costs from your loans to your savings rate earnings can help you decide which to prioritize.

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Today’s High interest rate environment It can have two primary effects on your financial situation.

For one, borrowing is more expensive. Everything from buying a home to taking out a personal loan to making credit card payments loan It is more expensive than a few years ago. But high interest rates mean great earnings on your savings. High Yield Savings Account And Certificate of Deposit (CD) Earn above 4% today and in some cases even Close to 5% APY.

So, if you have extra cash after paying your essential expenses each month, is it more beneficial to put more towards paying off your debt or contribute something extra to your savings? There are a few ways you can decide which one is best.

Before you get started, check here to make sure you’re taking advantage of high-yield interest rates with one of today’s top savings accounts.

Should you pay off debt or save money?

Before you choose between debt and savings, you should first ensure that you are at least meeting your minimum. For loans, this means making your minimum required payments on time and in full each month. This will help you avoid defaulting on your loan or line of credit Maintain good credit.

After that, whether to save or pay off debt may come down to your personal circumstances. Here are a few factors to consider:

Your current emergency fund

If not Emergency savings After all, you may be better off in the long run by focusing on adding a few hundred dollars to an emergency fund before tackling your debt. After all, if an emergency strikes, you risk taking on more debt if you don’t have the cash on hand to cover the expenses.

Although experts recommend staying at least Three to six months of expenses Prioritizing at least some amount each month in your emergency fund, reserved for emergencies, is a great starting point. With a high-income savings account, you can even Increase your balance over time including interest earnings.

Compare the top savings account rates available right now to find the best place to build your emergency fund today.

The interest rate on your loan

The interest you’re accruing on your loan each month can be a big reason to prioritize paying off your balance before focusing on other financial goals.

For example, if you have very high interest debt — ie high Credit card balance – You can benefit most by putting most of your remaining cash each month towards that loan.

On the other hand, say you have a loan that had a low rate when you took it out that only has a 4% interest rate. In that case, not only might it be a lower priority than your high-interest debt, but it might also be an opportunity cost to prioritize it over savings right now.

If you can earn 5% APY on money then you a High yield account, which can make you more money over time than you’ll save paying off the loan — given the 1% difference. This doesn’t mean you’ll ever stop paying off your debt entirely—just that you may want to prioritize saving money before putting more toward paying off your debt.

How to make the most of your payments

With today’s interest rates so high, both saving money and paying down debt are smart financial moves.

Of course, you can always decide to pay off debt while saving. If you take this approach, it’s incredibly important to stick to a budget so you can free up extra cash each month. Determine exactly what your expenses are and where you spend the most money. Then, you may be able to find places where you can save or cut those monthly expenses

automation Another smart way to meet your goals. You can set up automatic transfers to your savings account every time you make a payment — so you don’t even have time to miss money so it’s safely stored in savings. Alternatively, you may want to automate your repayments, so you can ensure you never miss a monthly payment and automatically account for it in your budget.

Finally, make sure you’re getting the most out of your savings a Competitive high-yield savings accounts. Choose an account with no monthly fees and minimum requirements that works with your budget. You’ll want to look for an APY of at least 4%, although many accounts today earn 4.5% APY or more.

Start maximizing your savings by comparing today’s top rates here.

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