Baby and the Budget: Saving vs. Paying Off Debt

Baby and the Budget: Saving vs. Paying Off Debt

August 14, 2018

Baby and the Budget: Saving vs. Paying Off Debt

Baby and the Budget: Saving vs. Paying Off Debt
Baby and the Budget: Saving vs. Paying Off Debt

Now that you have a new baby or one on the way, you’re probably taking a good, hard look at your finances. Babies have a way of making you do all that adulting stuff. Not only do they cost a lot to raise—diapers, childcare, college!—but you want to make sure you’re financially prepared for your family’s future.

That can mean creating a budget, cutting unnecessary expenses, purchasing life insurance, paying off debt and saving for emergencies and retirement. It can seem overwhelming, especially when you’re awaiting the arrival of baby or spending sleepless nights with a newborn.

When we surveyed Babylist parents, the two biggest financial concerns of both new and expecting parents were paying off debt and saving for retirement. Which makes a lot of sense. You know you’re supposed to be saving for the future, but how do you do that when you have debt to pay off?

Here are some pointers.

Good debt vs. bad debt

Not all debt is created equal. A mortgage, for example, helps you build equity and in many markets, it can be less expensive than renting. Assuming you bought a house or condo that’s within your budget and can afford the monthly payments, it can be a good investment.

But high-interest credit card debt is debt you don’t want. If you’re just paying of the minimum amount due, it could take years to pay off, and you could wind up paying thousands of dollars more than you owe in interest, depending on the amount of your balance.

Student and car loans are a little grayer. You need a car to get from point A to B in many areas of the country. And a college or postgraduate degree can increase your earning potential and is an investment in your future. But it’s also tough to be saddled with that much debt. Overall, you’ll pay less interest if you stick with the student loan standard federal plan, but if that’s killing your budget, there are other options, like income-driven repayment plans.

How to balance paying off debt vs. saving

If you don’t have money saved up for emergencies, you should probably work on building up a reserve before aggressively going after your debt. Why? If your radiator goes kaput or the heater in your house stops working in December, having a rainy day fund can help save you from going deeper in debt.

Once you’re feeling good about what’s in your emergency fund or if you already have a healthy one, it’s time to start concentrating on paying off debt.

In terms of retirement savings, if your employer offers a match, consider contributing at least as much to the account as they will match while you’re paying off your debt—if you can afford it. It’s a shame to miss out on free money if you can make it work.

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Tips for paying off your debt

Debt snowball vs debt avalanche: These are two approaches to paying off your debt. Snowball refers to paying off the smaller debt first, regardless of interest rate. This can be a solid approach for people who feel overwhelmed by their debt or like to feel a sense of accomplishment. It’s a lot quicker to pay off $500 than $15,000.

Avalanche starts with paying off the debt with the highest interest rate. The idea here is these are the ones that will cost you more in the long run, when you factor in interest payments.

Many financial experts prefer the avalanche method because it saves you money on interest, but if you’re being really assertive about being debt free, either approach will get you there eventually.

Consider consolidation: If you have debt on multiple high-interest accounts, think about consolidating them into one lower-interest credit card. For instance, if your current interest rate is between 18% and 25% and you roll it all onto one card that’s, say, 7.5% or less, that a marked savings in interest over time. You can also take out a lower-interest personal loan to pay off credit cards. Keep in mind, though, you need to have pretty good credit to take advantage of these options.

Be as aggressive as you can: Put as much money as you can afford toward each payment. While you need to continue spending on necessities like groceries, utilities and all those diapers, you might be able to cut out a few takeout meals or streaming services from your budget and move that money into paying off debt.

So long story short: save for emergencies, then pay off debt, then aggressively save. The sooner you’re out of debt, the sooner you can start putting that money into your 401k, IRA or a college savings account for your little one.

What’s another good way to prepare for the future? Life insurance. Now you can crowdfund your life insurance policy premiums for the first year by adding it to your Babylist registry. Learn more here.

Article sponsored by The Prudential Insurance Company of America, Newark, NJ. This article is provided for your general information. Prudential and its representatives do not give legal or tax advice.

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