It feels good to save, doesn’t it? Actually, it feels right, like you are taking care of your future. Paying off debts, on the other hand, can seem like you are wasting money. You have to set aside money for your children’s college or for your retirement, or something else important to you. It’s better to put those funds into interest-bearing accounts than to use that money to pay off debts. Right? WRONG!
Current saving account interest rates are at all time lows so you won’t earn enough interest to offset the interest you have to pay on your debts.
As an example, if you owe $3,000 on a credit card at a 14% interest rate (APR), you make monthly minimum payments of $100, it will take you 38 months to payoff the debt PLUS you will have paid $713.99 in interest. By the same token, if you had $3,000 in savings, in 38 months, you would have earned less than $100!
Comparing the cost of your debt over 3 years+ at $713.99 and the earnings you can make if you put the same amount in a saving account (< $100), it really does make sense to pay off your credit card debt as a practical way to save money.
If you have enough coming in, or saved, that you can use to pay off debt, there is no good reason to hold onto it. Debt has its uses; but if you can either pay off a debt, or make larger monthly payments, it makes good sense to do so. Debt has expenses attached to it, while savings creates more money, so while you want as much as possible in savings, that should come after you get your credit cards, car loans, and other higher interest debt paid off.
If you can make extra payments to pay off your debt early, or make full payment, you will experience less stress about your finances. Also you can see improvement in your credit report when you pay off what you owe, this will improve your credit to debt ratio … an important calculation used by lenders to evaluate the credit you do have.
While it won’t be easy to give up what you have saved, or can save, at this time, if you have debt, you aren’t saving unless you get the debt paid down or paid off. You aren’t damaging yourself by paying off the debt, if you had an emergency and needed money, then you have the credit card(s) to use, or you could potentially be qualified for a lower interest loan from your bank.
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