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.