When you get a hold of a large chunk of cash — say, from a bonus, tax refund or item sale — those with the self-control not to blow the funds have to decide whether to save it or pay off debt. While there are other options available, such as investing or donating the money, saving vs. debt reduction is one of the tougher quandaries to decipher.
Go Banking Rates suggests making tough financial policy decisions in advance of receiving the windfall. For instance, if you’re short of your reserve fund goal, it’s a no-brainer to use the new money to fill up that account before you do anything else with it.
For hoarders, though, no reserve fund is ever high enough, and those hyper-savers can end up negating their savings interest rate by shelling out interest on balances that fall too slowly. On the flip side, those who are obsessed with getting rid of their debt can end up cash-poor if they suffer setbacks.
There’s no universally correct way to juggle debt and savings, so it’s up to you to allocate the funds depending on your income stability, savings needs and debt load. You should be OK as long as you put some critical thought into your decision.
Saving Money Vs. Paying Off Debt: Which Is More Important? [GoBankingRates]