Saving in a low-yield world
Should you pay debt before saving?

She suggests socking away six to 12 months of easily accessible cash to cover any unexpected expenses. Access to such money is especially important today, when many people have found their home equity line of credit has been reduced -- or even canceled.

Place acknowledges that it's difficult to tell people to save "in an environment where they are earning a fraction of a percent of interest on their savings" while being charged "usurious loan shark rates of over 30 percent on their credit cards."

"However, in the given economic circumstances, tough choices have to be made," she says.

Rubin generally belongs in the camp that advocates paying down debt before saving. However, he cites exceptions to the rule. In particular, he urges a "save first" approach in situations where a person's employer matches contributions to the company retirement plan.

“In the given economic circumstances, tough choices have to be made.”

"The guarantee provided by a matching program is even more valuable than repaying credit card debt, so one should always maximize the match first," says Rubin, who is author of the book "Beyond Paycheck to Paycheck: A Conversation About Income, Wealth, and the Steps in Between."

Rubin also says it's OK to delay paying off debt in circumstances where interest rates are low, such as zero-rate or low-rate car loans. In such cases, it's better to make scheduled monthly payments and not worry about devoting extra cash to paying down the debt faster.

Any extra income saved then should be funneled into savings in a high-interest savings account, Rubin says.

Best of both worlds?

Still others suggest the best solution is to strike a balance between saving and paying down debt that you -- and your family -- can live with.

Paula Langguth Ryan of Cocoa, Fla. -- author of personal finance books, such as the forthcoming "Break the Debt Cycle -- for Good!" -- is an advocate of this combination approach.

She says paying down debt in a steady, systematic way while also building up a little emergency savings helps reinforce sound spending and saving habits that continue to pay dividends long after the debt is gone.

"You're actually retraining your money habits," Ryan says.

Ryan concedes you may net more money by paying off the higher interest rate debt rather than putting money in savings. However, she says any short-term gain will be lost if you revert to using a credit card to cover emergencies.

"You just replace old debt with new debt," she says.

Creating an emergency fund is the only way to break the debt cycle, she says. Without such a cushion, chances are good that you will fall back into debt as soon as you're in a financial pinch -- no matter how much money you're throwing at your current debt.

"Save a reasonable amount to build up a nest egg, then increase your debt payments once you've saved up a certain amount -- about $500 to $2,000 -- to cover the usual cost of emergencies you may encounter," Ryan says.

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