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Deciding what works for you depends on your debt load, personal goals, and attitudes toward money. To figure out your plan, start by asking yourself these four key questions.
1. What’s my financial situation?
First, assess your financial health. Create a balance sheet that lists your assets, liabilities, earnings, and expenses.
Assets include anything you own, like a car or your savings.
Liabilities refer to anything you owe, like credit card debt or student loans.
Earnings refer to your net income.
Expenses include everything from rent and utilities to groceries and gym memberships.
Review the numbers to figure out how much of your monthly income you need to set aside for expenses and minimum debt payments. From there, you’ll be able to see how much money you have left over for savings or additional debt payments.
2. What are my personal goals?
What you’d like to achieve personally and financially in the next five to 10 years? Maybe you want to start a family, grow your retirement fund, or plan a bucket-list trip. Your goals will influence your financial decisions and influence paying off your debt. If you want to purchase property in a pricey area, for example, you may need to start saving sooner for a down payment.
Prioritize your goals, and consider also building an emergency fund in case the unexpected happens.
3. What kind of debt do I have?
Different types of debt can have different impacts on your finances. To understand the size and severity of your debt, look at these five factors:
If your loan private or public
How much money you owe
The interest rates for each kind of debt
The repayment terms
Your minimum monthly payments
Keep in mind that your attitude toward debt will also play a role in your plan. If you feel confident you can pay any debts back over time, making minimum payments might be sufficient. If you’re dealing with anxiety or feeling overwhelmed because of your debt, you may want to work toward paying it off quickly to save yourself stress.
4. What are the pros and cons of each option?
Now that you have a better grasp of your financial situation as a resident, weigh the advantages and disadvantages of saving versus paying down debt.
Focusing on paying down loans/debt
Saving money on interest over time
Freeing up money after debts are paid
Potential stress reduction
You have to make financial sacrifices
It may take longer to build your savings
Focusing on savings :
The earlier you start saving, the more your money can grow over time
Money can be used for various life goals like buying a home, auto, or creating an emergency fund.
Debts take longer to pay off
Interest on debts increases the total amount you pay over time
Deciding whether to pay off your debt or save can be a tough decision, but reviewing your finances and clarifying your goals can help.
This article is intended as general information only and is not to be relied upon as constituting legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. Information presented is believed to be factual and up-to-date but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or any of its affiliates.