While the debate rages as to whether or not we are in a recession, and whether one will really come, the reality is that most people still have debt to worry about. And it is important to have some savings set aside as well — whether or not we really end up in a recession. At any rate, on one of my other posts, about how to help your personal finances survive a recession, this question came up in the comments section:
Would you suggest saving money first as opposed to paying down the debt?
This is a question to close the heart for many. On one hand, the interest accrued by debt (especially credit cards and other consumer loans) usually far outweighs even the interest in a high-yield savings account or investments. So what you pay out easily surpasses what you can save. However, it is important to do both.
Here is what I recommended in my answering comment:
I would suggest taking a hard look at the situation. Are there places to
cut back? Most families “waste” 10 to 15 percent of their income each
month. In the more desperate circumstances, I would see how long one
can keep making minimum payments (icky, I know) and save the money to
shore up against the coming recession with savings (especially if the
job looks to be in jeopardy). However, if you have a stable job, it is
a good idea to start paying down debt. Having as little debt as
possible is important in a recession. Another thing that can be done
now is this: Figure out how much you can cut back each month. Take 15%
of that and put it into saving. Put the rest toward debt reduction. If
you get a tax rebate, follow the same rule. It may not seem like much,
but when you aren’t doing any of it right now, any little bit helps.
And it will help build good habits.