3 Red Flags Indicating You’re Putting Too Much Money Toward Debt
Written by
Peter Burns
Edited by
Molly Sullivan
Commitment to Our Readers
GOBankingRates' editorial team is committed to bringing you unbiased reviews and information. We use data-driven methodologies to evaluate financial products and services - our reviews and ratings are not influenced by advertisers. You can read more about our editorial guidelines and our products and services review methodology.
20 Years
Helping You Live Richer
Reviewed
by Experts
Trusted by
Millions of Readers
Nobody likes being in debt. Taking aggressive measures to pay down your debt faster can be rewarding and lead to better financial health. When you pay more than the monthly minimum, you chip away at the loan’s principal and, in turn, pay less interest over time.
While many personal finance experts advise you to pay off your debt as fast as possible, putting too much money toward your debt can have harsh consequences. Here are three red flags indicating that you may be putting too much toward your debt and should consider rebalancing your finances.
You Don’t Have Any Savings
If you have outstanding debt, building up your savings might sound counterintuitive, especially if the interest you’re paying on your debt is more than the interest you’d earn by saving. However, putting some money aside for an emergency fund can save you from taking on even more debt down the road.
A U.S. News survey found that only 2 in 5 Americans have an emergency fund. If you fall into this category, you may want to reconsider putting so much money toward your debt.
Imagine that you’re aggressively paying down your debt rather than saving, and your car breaks down. You’ll have to take on even more debt to fix your car. The interest on this new debt means you’ll end up paying even more over time, and all of your efforts to pay down your debt faster will have been in vain.
If you build up an emergency fund ahead of time, though, you’ll have a buffer to keep you from going further into debt.
You Can’t Cover Your Essential Costs
If you find yourself struggling to cover basic costs like groceries, gas and other everyday goods, you should rethink where your money is going. It’s important to leave yourself a little bit of flexibility each month so you can live comfortably. You should also eliminate the possibility of needing to put something on your credit card at the end of the month and adding to your debt.
The best way to do this is to track your spending.
When you track your spending by recording your purchases, reviewing your credit card bills or using a budgeting app, you get a sense of where your money is going. If you’re adamant about aggressively paying off your debt, see where you can cut costs in other areas. You’ll also be able to see your spending trends and balance them over the course of the month.
You’re Sacrificing Your Future
Getting out of debt will make for a better future. However, taking some of the money you have coming in and investing it in your retirement is equally important. Contributing to a tax-advantaged account like a Roth individual retirement account or a 401(k) every month is one way you should be securing your future finances.
These retirement accounts allow you to compound the growth of your contributions over time without paying capital gains taxes. Some 401(k) plans also have the option for an employer match. When you contribute up to a certain amount each month, your employer may match that, giving you “free” money. If your debt has a low enough interest rate, you shouldn’t miss out on maximizing your employer match just to pay off your debt faster.
More From GOBankingRates
