This question comes up frequently-mostly from people who have little savings and a lot of debt. The idea that you are supposed to pay off debt first and save money afterwords is starting to be challenged these days.

But, the question is almost always posed as an "either-or". This is a choice of false alternatives, most of the time. Of course, there are situations when you are simply unable to save any money. However, as a principle, "saving money vs. paying off debt" is the wrong way to look at your finances.

Your financial goals cost money-by definition. Some of your goals are long-term goals that require consistent savings. If you have no long-term goals, you have no reason to save money (which doesn't make the lack of long-term goals a good thing). But, if you do have long-term goals, and you are giving up saving money to pay down debt, you could be sacrificing one value for another-sometimes lesser-value.

For example: should you forgo 10-15 years worth of retirement savings to pay off your mortgage early? This could end up being a sacrifice if your expected retirement savings turns out to be less that you need or want. In fact, many times, paying off your mortgage early DOES sacrifice your future retirement savings because mortgages are paid in simple interest, while your retirement savings earns compound interest. This means that your retirement savings would have grown at a much faster rate than what your mortgage was costing you. Instead of making money, you gave up thousands, perhaps hundreds of thousands of dollars needlessly. You sacrificed your retirement for the immediate benefit of eliminating interest payments on a mortgage.

Point blank: sacrificing your values, especially your long-term, important ones, is never a good thing. Life never requires sacrifices. Trade-offs, yes. But sacrifices, no. In fact, I would argue that sacrificing your values is morally wrong. Now, not many people willingly or knowingly sacrifice their retirement. They simply make mistakes due to a lack of knowledge. But, these mistakes can be avoided by hiring a professional and knowledgeable financial adviser to teach you sound principles of financial planning.

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This entry was posted on October 26th, 2009 by David C Lewis, RFC. Edits may have been made to keep this entry current. · No Comments · Budgeting & Money Management, Insurance & Savings