Should I Use Savings To Pay Down Debt?

Share

One of the most common questions asked by people attempting to manage their own finances is “Should I use my savings to pay down my debt?” The answer in most cases is yes, because the interest rate that you are paying on your debt is often much higher than the interest rate that you are receiving for your savings. However, you should not use all of your savings to pay off your debt because if a financial emergency occurs, you will not have anything to fall back on. Here are some tips that will help you pay off your debts while still remaining financially secure.

Establish An Emergency Fund

Before you begin using your savings to pay off your debts, make sure that you have an emergency fund established that you can use in the event of an unexpected financial event. This emergency fund should contain at least one month worth of expenses or $2,000, which ever is higher. Having this emergency fund available will ensure that you will not have to incur debt if something unexpected happens because you will have the money available to deal with the situation.

Focus On The Highest Interest Debt First

If you do not have enough savings available to pay off all of your debts, you should focus on the debt with the highest interest rate first. By paying down the debt with the highest interest rate, you are reducing the amount of interest that you are paying to your creditors over time. Once you have eliminated the highest-interest debt, move to the debt with the next highest interest rate. By maintaining this focus, you will be able to eliminate your debts in a logical manner that costs you the least amount of money.

Make At Least The Minimum Payment For Each Debt

While attempting to pay off your debts, make sure you are making at least the minimum payment to each of your creditors. If a payment is missed or is under the minimum amount required, the creditor can tack on late fees and other fees that increase the amount of the debt that you must pay. These fees are added directly to the balance of the account where they are subject to interest charges if the entire balance is not paid off before the next statement date. Once your debts have been eliminated, you can begin saving again to rebuild your savings account and increase your financial security.

Join our newsletter

Screen_shot_2017-04-25_at_1.05.57_pm

Subscribe to get the latest "Engineer Your Finances" content via email.

Powered by ConvertKit
About the author

3 Responses
  1. I think this really depends on the unique situation.

    If you have debt > 8% APR, should you pay it off for the sure thing with savings that is just sitting there when an emergency may or may not happen.

    If you have decent credit, I say pay it off more aggressively and take the gamble that the risk will not happen. You can always charge back what you’ve paid off if an emergency comes up, right?

  2. If you’re really hesitant about the idea, you can always break it off into chunks and see how it works. It’s important, as noted, to keep some cash on hand, so the first rule is don’t even consider taking your savings down to zero. But say you have $1,000 after that which you’re considering, but you’re not sure. Try putting $100 toward something one month and see how it works out and how it feels. If it feels right, then keep doing another $100 a month and feel free to stop along the way if something else comes up or if it doesn’t seem to be the right approach for you.

  3. I do have an emergency fund set aside. Right now, I am trying to pay off my debt without having to sacrifice my financial security and I am paying first those debts with the highest interests.

Join our newsletter

Subscribe to get the latest "Engineer Your Finances" content via email.

Powered by ConvertKit

ModestMoney.com Top Finance Blogs

Archives