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 can even think that the popularity of all of those end of the world stories comes from some wish that something, even anything, would come along and wipe out our creditors!
Is your debt really hurting you? While most of us would like to pay down high interest credit cards, we also need to build up a savings account. There is no right answer for everybody, but only an answer that works for you.
Consider Changing Your Debt
Instead of paying it off today, is there a way to pay less interest for it? You may be able to find a lower interest rate on your loans. Credit cards could be moved to a friendlier company, and homes or cars could be refinanced. You may be shocked at how much lower your bills will be if you can reduce your interest rates.
Consider your credit cards. Some interest rates are really out of control, and many consumers report sudden rate hikes to twenty-five percent or more! If you carry $10K on your credit cards, and many people do, that means you have to pay $2,500 a year to service that debt! Even if you could just cut that rate in half, you would save twelve hundred and fifty dollars every 12 months.
Do Not Neglect Savings
In your efforts to pay down your credit cards and loans, try not to neglect your savings or investment accounts. Emergencies happen, and you do not want to have to depend upon even more credit. If you do need to deal with a health emergency or make a sudden trip, you want to be able to have some cash.
Try to Stay The Course
The way people have managed to pay off debt is to make a plan and stick to it. Even if you can only set aside $100 a month toward paying off debt, plus another $100 a month toward your savings account, you can still help yourself out.
But if you plan to use $500 to pay off debt, and then never get around to actually doing it, you will not help yourself.
Consider Returns on Credit and Savings
Do you have a fairly good home loan with a lower interest rate? Do you also have a way to save your money that pays high returns? Then you do have to consider that you may be able to deduct the home loan interest, but have to pay taxes on your savings. In this case, you will probably do well to leave things alone.
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.