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Save or Pay off Debt?

Uncategorized Jun 17, 2020

I get this question ALL. THE. TIME.  Do I use my savings to pay off debt or keep it in savings?

Truthfully, this answer is going to suck for most of you -- the answer: it depends.

I know, such a crappy answer lol.  But here is why:

I believe you should have $1000 in an emergency fund that is not easy to get at.  What I mean by that, is that it's in an account where you don't have debit card access.  It requires some movement of funds to get access to it.  Simply put, it's to be used for EMERGENCIES only so you don't need 24/7 access to this money.

Once this is saved, then my philosophy is to make sure you have protected your assets, income and health using lower cost insurance options AND then use the leftover money to put towards debt.

Now you can see why I said "it depends"?!  It depends if you have an emergency fund set up and have taken care of insurance needs.

If these two areas are covered and you have debt, then absolutely, you should be putting your extra dollars towards debt instead of saving.   I know a lot of my clients have a hard time with this in the beginning and the reason is that they worry about no longer having 'access' to the money if they need it.   But the reasoning behind this is flawed.  And here's why:

Lets say you owe $5000 on your credit card and you have $3000 sitting in savings.  Your credit card is likely costing you 19.99% interest or $999.50 per year!   If you were to leave $1000 in savings for your emergency fund, and put $2000 on your credit card, you would now be paying $599.70 in interest per year on the remaining $3000 balance.  If you kept your monthly payments the same, that extra $400 that is no longer going towards interest, is bringing down your balance to $2600!  

So by leaving your money in your savings account could actually costing you money...in this case, $400 per year!   That extra $400 is better served going towards your credit card to bring the balance down even more than it is going out the window in extra interest charges.  

Bottom line...if you have debt, build up a $1000 emergency fund first, get insurance in place and then start tackling your debt before building up your savings account.

Yours in financial health,

Heidi

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