Save Money or Pay Off Loans?
Debt or Savings?
Do you think about life without debt. I know that most people think that their lives would be easier if they did not have to allocate part of their budget toward home loans, car payments, and of course, credit cards. Some of us even picture a dream life, in a shack by the beach, with nobody to pay.
I really think that those end of the world books became popular as an escape. Even if something awful happens, like a zombie invasion, it would still wipe out all of our creditors too.
But are we better off without debt, or should we had onto cash? I think the answer is complex, and like most things in life, it depends.
Juggling Debt
Even if you cannot totally cut your debt, you may be able to reduce it. Look for refinance offers, or offers to transfer your credit card bills to a lower rate card. If you can reduce your interest rate by a couple of points, you may save lots of money every year.
Look at high interest rate credit cards. It is not unusual to see 25% interest rates these days. If many Americans carry $8,000 in debt, that means they have to pay $2,000 just to service it. If you could reduce that interest rate to 12.5%, you could save $1,000 every year without working any extra hours.
Do Not Neglect Savings
A savings account can keep you from having to borrow more money. If you have to take a kid to the dentist or emergency room, you will be happy to be able to right a check for your portion of the payment. I would not tell anybody to pay off all debt if it means they have no way to get cash.
Make A Plan You Can Stick With
You need to have a goal, and a way to reach that goal. Consider putting an extra fifty dollars toward paying off loans, and then allocating an extra fifty dollars toward your emergency fund. Even a modest amount is better than nothing.
If you set goals you will never meet, you will never do yourself any good either. A thousand dollars toward debt, that never actually gets paid, will do you no good.
Consider Returns on Credit and Savings
If you are lucky enough to have a low rate mortgage, but a high return investment account, you will probably do better to leave things as they are. If you can earn 8% on your money, but only pay 6& on your mortgage, you may be better off by paying off your home the slow way.
Think about the impact of taxes too. Most of us can deduct our home loan interest, but we have to pay taxes on the gains we make.
