You Should Most Likely Use Your Savings To Pay Off Debts

Written by admin on December 6th, 2010

A quick check of a few websites and newspaper columns that offer financial advice on paying off debts and getting loans, reveals that the most common question that’s being asked right now, isn’t, “Where can I get a cheap bad credit loan?”, or “Can I get a government grant to pay off my debts”, but “Should I use my savings to pay off debts?”.

BTW – There are no government grants available that can be used to pay off debts!

So Should You Use Your Savings To Pay Off Debts?

It probably needs to be explained right up front, why so many people keep asking the question, and why there are so many different answers. The answer is, that no two people’s situation is the same, which in turn means that the answers will vary.

The First Part Is Easy.

Take a look right now and seeing how much interest you’re paying on your debts, and compare it with how much you’re getting on your savings. If you’re receiving less interest on your savings account than you’re paying your creditors, then paying off your debts would obviously make sense.

But that’s by no means the whole of the story, and it would nice if it were as simple as that.

If you have enough money to pay off all your high costing debts and still have some money on hand, then of course you should pay off your debts, but it’s unlikely that you’d be reading this, if that were your situation.

Always Keep Some Money For Emergencies.

a) Imagine that you used all your savings to pay off a lot of your debts but still had a lot to be paid off. You get an unexpected medical bill, get laid off, or have to take care of some other unexpected event, and you can’t make the minimum payments on your credit cards or other loans.

The extra interest that you’ll have made will get wiped out very quickly, and so will your credit rating.

b) Suppose that for some reason your salary doesn’t get deposited into your bank account when it should do, and there are a myriad reasons why that can happen, such as holiday week-ends or glitches in someone’s payment system. Most, or all of your payments will go unpaid and you’ll incur all kinds of charges and fees from lenders.

Just How Big Should Your Nest Egg Be?

It varies a little, but a good yardstick would be at least three times your monthly expenses, and much better would be six months. Most Europeans would consider six months to be about right, whereas many Americans haven’t even got two weeks survival money in their savings accounts.

The State of California had the American mindset and look at it now.

It’s paying people with IOUs because it’s bankrupt.

Some General Advice Is Possible.

Although there’s no fixed answer to the question of whether a person should use their savings to pay off their debts, there is some general advice that can be given.

1) Set aside three months expenses if you can, but not less than two months, in case you need the cash to cover any unexpected events.

2) Use the rest of your savings to pay off or pay down the debts that are costing you more interest that your receiving on your savings account.

A mortgage or fixed rate student loan is not something that you’d typically want, or even be able to pay off, but your credit cards are, and if you can’t pay them all off with your savings, then pay off the ones that are charging the highest interest rates and fees.

3) If you do manage to get rid of your high costing debts, the next step would be to increase the amount in your savings account to six months if you can.

4) If you have a good job and succeed in doing all of the above, then you might want to think about making some investments, and if you have a hobby that you’re an expert on, then you might want to invest in that.

I’m talking about stamps, collector’s items and antiques etc and not financial investments, unless you really understand them.

It’s good to be cautious, but paying large amounts of interest for little or no reason makes little sense.

So if you have the money to pay them off then you should do so, as long as you keep some money set aside as suggested above.

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