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Pros and Cons of Using Savings to Pay Off Debt
November 15, 2019
Table of Contents:
Pros and Cons of Using Savings to Pay Off Debt
Some people might say that it’s not possible to repay a loan and save money at the same time, and they’re right. However, when your loan is bigger than a mountain, using your savings might be the only thought that comes to mind. So, which of these directions should you give preference? Should you put money in savings or pay off debt? Experts claim that it is much more profitable to repay the loan as soon as possible. Let’s take a closer look at the debt vs. savings problem.
Take a Look at Your Current Situation
According to the Federal Reserve Bank of St. Louis (one of the 12 banks that make up the U.S. Federal Reserve), the percentage of personal savings in the U.S. is only 4.2%. That’s a big problem. Especially if we take into account that, according to the majority of financial advisors, it is necessary to save from 10 to 20% of your annual income. Some experts argue that if you have a high-interest rate debt and a lack of savings at the same time, in the long run, the best option is to invest all of your money in the repayment of the debt. But this strategy only works if you have some time at hand.
However, if your debt gets you depressed and you barely have enough money for a potential emergency situation, paying off debt with savings is not a good idea. It’s logical – if an emergency arises and you have no funds to deal with it, you will be forced to empty your credit card again and increase your debt.
There are some great reasons to make savings your top priority, and a debt with a low-interest rate is one of them. If you are in this kind of situation, the answer to the question, “Is it better to pay off debt or save for a down payment?” for you, will be to save your money.
On the contrary, if you have a high-interest debt, paying it down first may be a better idea than saving money. You will receive a certain income by reducing interest payments. This is often more than you earn in the stock market and definitely more than you earn in a savings account.
Nevertheless, as long as there is no right answer to the dilemma of savings vs. credit card debt, there is one very wrong strategy, and that is to do nothing. If you are in the process of settling your debt, get professional financial help from DebtQuest USA. Our company already has hundreds of satisfied customers who previously struggled with their unsecured debts. With DebtQuest USA, you will easily solve your financial problems. Don’t postpone your decision and contact DebtQuest USA today!
Get Help With Your DEBT
get help nowWhen Using Savings for Debt Repayment is a Good Thing to Do
The repayment of debts is tax efficient. Suppose that your savings are in a tax-free account. If your money is in a standard savings account, you will pay tax on the interest you earn and lose even more. Moreover, you may actually be financing your own loans while your savings and debts are in the same bank.
This is because the bank will most likely pay you a reduced interest rate on your savings, more than they do on your debts – you lose, and they make a profit. Therefore, sometimes, it is very important to use your accumulated savings to pay off the debt on which the interest is paid.
Credit card debts, with a high-interest rate, burden you with staggering interest; making it impossible to get even a minimum return from your savings account. Therefore, if you have several different debts, repayment of the most expensive of them, even with the help of a savings will be more logical and profitable. Similarly, only a monthly minimum debt repayment, in order to save money, means that you will need much more time to get rid of the debt.
The decision of whether you should use savings to pay off credit card debt or not is yours completely. However, the main thing to remember when choosing such a strategy is that the sooner you repay all of your debts, the sooner you will have free money that can be turned into savings.
See also:
Three Options to Pay Off Debt Without Touching Your Savings
If you still can’t decide how to save money and pay off debt at the same time, there may be a solution for you. Consider one of these three options as your way out of the debt trap:
- Debt management. A loan advisor will help you here. This includes a thorough analysis of your debts and the creation of a debt management plan. This plan contains a hypothetical plan for reduced monthly payments which extends them for a longer period of time.
- A loan for debt consolidation. This debt relief program provides additional credit that can help you repay all or part of your existing debts. You will be able to consolidate your old debts under one low interest loan.
- Debt settlement. If you need to reduce your debt, this is a solution that can work for you. The idea is to convince the creditor that you are in a financial crisis. Then the lenders are offered an amount that can be used to pay a certain part of your debt. You ask them to accept this lump sum and write off the rest of the debt (or the part of it that cannot be covered by this large payment).
The debt settlement strategy is often the most profitable one. If you need any assistance, you should contact DebtQuest USA. Our company will enroll you into a debt settlement program based on your budget and hardship. This way, you can start saving money to pay off the creditors while Debt Quest USA negotiates with them.
Get Help With Your DEBT
get help nowFinancially Literate Approach
If you pay off your debt properly, there may be no need to use savings to pay off credit card debt. To understand how much of your income can be donated painlessly, you need to make a personal budget. Enter a separate item for your debt repayment expenses. If there are surpluses at the end of the month, also use them as contributions.
Determine your spending priorities. If there are debts, large purchases should be postponed. Don’t buy expensive things while you are repaying your loans. This will take money away from helping you to get rid of your debts at an accelerated rate. Current costs should be cut back. You shouldn’t refuse to buy things that are a legitimate priority, but consider replacing them with cheaper options.
Calculate your expenses. If you constantly monitor your finances, it becomes clear where most of the money goes. Pay attention to small purchases: coffee, unnecessary clothes, accessories. Using this method, you will be able to progressively pay off your debt, without using any of your savings.
Instead of A Conclusion – The Perfect Decision
The best answer to the question ,“Should I use my savings to pay off debt?” is to keep the balance between your savings and debt repayment. You may be paying more interest than you need to, but saving to cover sudden expenses will keep you from entering the debt cycle.
In addition, having enough savings provides peace of mind. Some people are less likely to be comfortable with any strategy that will make their savings go below a particular level. For them, saving and repaying their debts at the same time may be the best option.
