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How-To Use Your Savings To Pay Off Debts

By Michael Redbourn

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Published: 29Jul2009
Word count: 751
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A quick check of a few websites and newspaper columns that offer financial advice on paying off debts and getting loans, reveals that the most common question that's being asked right now, isn't, "Where can I get a cheap bad credit loan?", or "Can I get a government grant to pay off my debts", but "Should I use my savings to pay off debts?".

BTW - There are no government grants available that can be used to pay off debts!

So Should You Use Your Savings To Pay Off Debts?

It needs to be said right up front that the reason that so many people keep asking the question, and the reason that there are so many different answers is because like always, there are multiple answers and they depend on the questioner's situation.

The First Part Is Easy.

Take a look right now and seeing how much interest you're paying on your debts, and compare it with how much you're getting on your savings. If what you're getting less interest on your savings than you're paying on your debts, then you'll clearly save money by paying off your debts.

But that's by no means the whole of the story, and it would nice if it were as simple as that.

If you have enough money to pay off all your high costing debts and still have some money on hand, then of course you should pay off your debts, but it's unlikely that you'd be reading this, if that were your situation.

Always Keep Some Money For Emergencies.

a) Imagine that you used all your savings to pay off a lot of your debts but still had a lot to be paid off. You get laid off, or you have to pay a medical bill or take care of some other crisis, and you can't make the minimum payments on your loans and credit cards.

The extra interest that you'll have made will get wiped out very quickly, and so will your credit rating.

b) Suppose that for some reason your salary doesn't get deposited into your bank account when it should do, and there are a myriad reasons why that can happen, such as holiday week-ends or glitches in someone's payment system. Most, or all of your payments will go unpaid and you'll incur all kinds of charges and fees from lenders.

So How Much Money Should You Keep Available?

It varies a little, but a good yardstick would be at least three times your monthly expenses, and much better would be six months. Most Europeans consider six months the norm whereas many Americans don't even have two weeks money set aside.

The State of California had the American mindset and look at it now.

It's paying people with IOUs because it's bankrupt.

Some General Advice Is Possible.

Although there's no fixed answer to the question of whether a person should use their savings to pay off their debts, there is some general advice that can be given.

1) Set aside three months expenses if you can, but not less than two months, in case you need the cash to cover any unexpected events.

2) Use the rest of your savings to pay off or pay down the debts that are costing you more interest that your receiving on your savings account.

A mortgage or fixed rate student loan is not something that you'd typically want, or even be able to pay off, but your credit cards are, and if you can't pay them all off with your savings, then pay off the ones that are charging the highest interest rates and fees.

3) If you do manage to get rid of your high costing debts, the next step would be to increase the amount in your savings account to six months if you can.

4) If you have a good job and succeed in doing all of the above, then you might want to think about making some investments, and if you have a hobby that you're an expert on, then you might want to invest in that.

I'm talking about stamps, collector's items and antiques etc and not financial investments, unless you really understand them.

Caution is good, but paying a huge amount of interest on debts doesn't make much sense if you're sitting on enough money to pay them off, or at least greatly reduce them, and as long as you keep some money set aside as suggested above, then paying them off would be the suggested way to go.

The author of this article was a film producer, and award winning film sound editor for many years. He has a major interest and flare for economics, and one of his websites -> Free From Debts is for those that want to get free from debt quickly, and it has information on how to eliminate 90% of your debts by simply sending a one page letter.

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