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Home / Debt / Using Your Savings To Pay Off Debt: Good Idea or Bad?

 

The majority of Americans carry debt and have some money in a savings account, which leads us to the question of the day:  should you use your savings to pay off debt? Depending on your mindset, the answer may seem to be straightforward, but you should think carefully before answering.

The answer is more about balance than an absolute; if each person works slowly through a question of this type, they will make the best financial move. In order to find the best answer for yourself, you should work your way through a thought process that includes:

  • How much do you have in emergency savings? This is an amount that you will not dip into unless you are unemployed or ill. Opinions vary as to how much you need to have tucked away. Here on Repaid, we advise that you have three months of your expenses saved at all times.
  • How much is the debt costing me? If the interest rate on your debt is higher than 6-8 percent, then you will most likely save more by paying the debt off than by saving the money.
  • Do you have a windfall coming? Bonuses, gifts, and income tax returns are great opportunities to buy the things you have been putting off all year. They are also great opportunities to pay down some of that high interest debt. The most satisfying option would be to blend the two. Make one frivolous purchase and apply the balance of the windfall to your debt.
  • What does the future hold? Are you considering a new business or buying a home, perhaps a car? When buying a home or car, your debt-to-income ratio and credit score are pivotal. Both will be improved by paying down debt. Starting a business is always cash intensive. Even if you get a small business loan, there are going to be cost overruns and early income shortfalls, so your savings account may be your best friend.

At the end of the day, a balanced approach may be best. Think of it this way…if you pay off your credit cards, then need to use them again because you are cash-strapped, what have you gained? The complete ambiguity of the answer to our question is exactly why each person should go through the thought process listed above.

 

About the author: Jerry Coffey

 

Jerry Coffey spent many years in a debt-riddled gray area somewhere between broke and desperately broke. His seemingly endless need for more and more cash led him to payday loans, repossessions, bankruptcy, and depression. After years of the same financial style, he heard a piece of advice that inspired him to find a way to change. The advice: ''The very definition of a fool is someone who continues to do the same things, but expects different results.'' This led him to a much more frugal lifestyle that sees all of his bills paid on time and a growing savings account. Even the seed of a retirement account has begun to sprout.

 

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