Should You Focus on Saving Money or Paying Off Debt in 2014?

US News

Did you make a New Year's resolution for 2014? If so, you're just one of about 40 percent of Americans who have, according to various estimates. And given the economic climate, it wouldn't be surprising if your resolution had something to do with improving your finances.

According to a gobankingrates.com survey of 1,506 people last month, 39 percent of respondents resolved to save more money in 2014. The next most popular financial New Year's resolution was to pay down debt, at 29 percent.

Maybe you share one of these goals or simply want to get your finances in better shape than they were in 2013. Either way, it's crucial to examine whether your efforts would be best spent saving money or paying down debt today.

The Fed and you

On Dec. 17, 2013, the Federal Reserve made the announcement that it will begin tapering QE3, its monthly bond-buying stimulus package, from $85 billion to $75 billion per month. It will not, however, raise the federal funds target rate, which the Fed advised will remain near zero until the unemployment rate falls below 6.5 percent.

What does that mean for you? On the most basic level, long-term interest rates will begin a long, slow upward climb from their rock-bottom lows of 2013 - gradually making borrowing more expensive while saving will likely remain just as unrewarding as it's been the last five years.

Essentially, your dollar will be crushed on two fronts: debt will become costlier while savings rates fail to keep up and pay close to nothing.

Save up or pay up?

Some personal finance experts believe saving a substantial safety net of cash should come before any other money move. In fact, building a $1,000 emergency fund is the first of Dave Ramsey's "seven baby steps" for getting out of debt, and even comes above making a payment toward outstanding balances.

The idea is you need to be prepared for financial emergencies - car repair, job loss, etc. - so that you don't load up on more debt should an unexpected bill arise. Not to mention, it's psychologically satisfying to see a positive savings account balance.

The problem is, mathematically, you lose money by putting away cash instead of addressing outstanding debt. Feeling good just doesn't pay the bills. For every dollar you put away, several are lost to loan interest.

As Chicago Tribune financial columnist Gregory Karp told gobankingrates.com, savings rates might be rising, but they are still extremely low. "You'll get more bang for your buck by using cash to pay down consumer debt such as credit card balances," he says. "That doesn't mean saving money isn't important. An emergency fund can help you avoid placing unexpected expenses on a credit card and paying finance charges, but the math is clear: A dollar will work harder by paying debt."

Of course, to say you do one thing over the other ignores the fact that no two people's financial situations are exactly alike. What might work well for one person might be disastrous for another and vice versa.

Author and personal finance guru David Bach says people who do both are the happiest. "People who just focus on paying down debt often get depressed about the slow progress and give up," he says. "When people save at the same time, they see some progress on their debt and on their savings, which keeps them motivated to keep going."

The bottom line: If you have a sum of money at the end of each month that you could either put in a savings account or put toward a debt payment, cover your bases - split it up and do both. You'll make progress on your debt while growing a safety net, however small. Having a resolution to improve your finances is a great goal to for 2014, but make this a year of balance and keep yourself motivated to accomplish your New Year's resolution.

Casey Bondis the managing editor for gobankingrates.com, a source for CD rates, savings account rates, personal finance news and more.



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