Why You Should Pay Off Your Debts With Your Savings

By: Andy Jones
Submitted: 2008-12-01 12:23:20
Print this article | Tell a friend | For publisher | Social Bookmarking
Rating:
 

Paying off your debts with your savings does sound rather bizarre. If you spend months or years saving up some spare cash why would you want to pay off your debts with it? The answer is quite simple and it’s all down to interest rates. Or specifically, the difference between the interest rate you are paying on your debt and the interest rate you are receiving on your savings.

The interest on your debt (e.g. credit card or loan) will nearly always be higher than the interest you will get on your savings. E.g. if you had $1000 worth of debt on a credit card at 18% interest – this will cost you $180. If you had $1000 in saving you may only get a return of around 4% so you will only earn $40. Now, if you pay off your debt with your savings you will be $140 a year better off!

It’s a simple formula that the fact that debts nearly always cost more than what your savings can earn. You are simply throwing money away and lining the lenders pockets by keeping your debts. Banks love this as you are giving them your money as savings (which they use to invest for themselves) and they get money from you as interest on your borrowing.

Now this may sound fine but most people have savings for a reason and that is often to have as an emergency fund in case the unexpected happens such an expensive car bill or your roof falling in. So how do we deal with emergencies without the cash in your account? Well fortunately emergencies don’t happen very often and if you need to money then at you simply re-borrow it. The chances of needing large amounts of cash for regular emergencies are quite slim. You can even borrow the money and shift the debt to a credit card with a 0% balance transfer or low starter interest rate. There are many options.

Granted, if you re-borrow your $1000 to pay an emergency you are back in the situation you were in before you paid off the debt with your savings. However, if this emergency did not happen and you did not have to borrow the $1000, you have been $140 a year better off. So for every year you don’t need to re-borrow, you are $140 a year better off. Save this $140 a year and you soon will have enough again for your emergency fund – but without any debts!

If you have debts and savings then you are seriously overspending far more than you need to and the only winner is your bank. Although it’s nice to feel safe and secure by having savings in the bank however, while you have debts, you are simply throwing money away.

The only time where paying off you debts with your savings does not work is if you have problems re-borrowing the cash but its usually possible if you have a credit card. If you have a personal loan you may not be able to borrow the cash. In this case an emergency fund may be necessary.

For more great tips like why you should be paying off your debts with your savings and for help and advice to solve all of your debt problems go to Me Debt Free

Article source: Expert Articles

Most Recent Articles in Debt Relief category

  • Top 3 Debt Relief Solutions - By: Justin Narin
    There are as many forms of debt relief out there as there are ways to get into debt. You've probably heard terms like debt consolidation and credit counseling, but have you heard of debt resolution, debt settlement and debt roll-up? Since there are so many debt relief alternatives, it is important to learn about all of the options and then assess what your primary needs are - so that you can pick the debt relief option that best fits your needs.
  • Debt Reduction FAQ's - Freedom Debt Relief - By: Murali Bhat
    FDR's Debt Reduction Program, also know as Debt Negotiation or Debt Settlement, is an aggressive approach to becoming debt free. It is appropriate for debtors with a serious amount of debt or who are considering credit counseling or bankruptcy.
  • How to be debt free - By: Justin Narin
    Many Americans are burdened with large amounts of debt and struggle to make the monthly payments. If you are in debt, then Use these debt pointers to help you get debt free.
  • Why You Should Pay Off Your Debts With Your Savings - By: Andy Jones
    You can be far better off by paying off your debts with your savings. By not doing this you are lining the banks pockets and simply throwing money away.
  • Top Ten Ways To Get Out Of Debt - By: Andy Jones
    If you don't deal with your debt problems, they will soon grow quickly out of control so you must face facts and address your debt issues now. By failing to take action now, you may be risking financial ruin. Follow these top tips to get out of debt so you can live a happier, debt free life.
  • How To Avoid Debt While Using Credit Cards - By: Andy Jones
    Although credit cards are so useful and convenient, so many people get into financial difficulties when using them. But it is possible to avoid debt while using your credit cards.
  • Debts are harsh, do away with them - By: Jason Holmes
    Debts can impact your financial status miserably. But you can take control of your finances before they get out of hand. Opting for debt consolidation can be the first step to a debt free life.
  • Debt Relief Program - By: Shane Peeler
    Debt relief can be any consolidation program that provides freedom from debt or help in the process of elimination. There are many alternative solutions to debt problems that are more or less efficient according to an individual's situation and debts involved.
  • Debt Elimination May Be Your Best Debt Cure - By: Jim Vrana
    Too much credit card debt is a financial disease that needs to be cured. Selecting the best debt cure can be a confusing and stressful experience. It is a personal decision on how a person can relieve their debt burden.
  • What should you do if you have credit card debt? - By: Simon Duffy
    Yesterday I read some worrying news that credit card spending is still increasing dispite the past 12 months warning we've had in the form of the credit crunch...