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Should You Use Your Savings to Pay Off Debt?
This is a question that I get asked often as a financial coach, so I wanted to share my insight with you and why I have this opinion!
This is a great question to ask, because there are a few factors to take into account, so you can make an informed decision whether this is best for you or not!
For starters, it depends how much debt you have that you want to pay off and how much you have in savings.
Always Have $1000 in Your Emergency Fund
If you are wanting to pay off a credit card balance let’s say for example, with money that you have in your savings account, it is going to depend on how much money you are using from your savings. If it is going to take all of your savings and you will be left with $0 in that account, then I don’t recommend doing this.
Yes, your credit card is likely your highest interest rate debt that you have and the interest accruing on it is growing quickly, BUT I don’t think that it is a smart choice to have $0 left for emergencies.
There are SO many things that can happen to you that will then throw you back into debt, meaning it wasn’t worth it to pay off your debt with your savings, because you are back again in debt. You didn’t accomplish anything and it probably caused you more stress. Doing this often leads to being stuck in a cycle of paying debt off, more expenses coming up, you being thrown back into debt to pay for them and around and around you go in the same cycle.
If you are using all of the money that is in your savings and you won’t have anything left after you pay down or pay off this debt, trust me it is not worth it.
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If You Will Have Some Savings Left After Paying Off Your Debt
If you are only using a portion of your savings (you will still have $1000+), but not all of it to pay off your debt it MAY be worth it. Emphasis on the MAY. Again there are many factors to take into account.
A few factors it depends on:
- How quickly you will be able to build your savings back up (knowing how much you will be able to contribute in the months to come to beef it back up)
- What expenses you have coming up in the next few months that are “non-regular” expenses. These are the ones that are on top of your normal fixed expenses. Ones that I am referring to are: car repairs and maintenance, home repairs, insurances, clothing, gifts, travel, etc. It is important to know this before you pull your money out of savings because your monthly expenses are going to be higher than normal because of these “non-regular” expenses that will be increased.
- Will your income be fluctuating in the next 1-12 months while you are trying to build that back up? Are you going on any trips, which will reduce your hours at work and may decrease the income you have coming in? Is a holiday like Christmas coming up where your income may be reduced? If you are an entrepreneur or business owner, do you have any down months coming up where you know business is slower?
- Are you able to pick up more hours at work or work overtime, to bring in additional income to speed up building back up your savings fund quicker?
- How are you going to feel mentally and emotionally, knowing that you have a smaller savings cushion, due to paying off this debt? Are you going to be constantly stressed? Is it going to have you worrying about “the other shoe dropping,” until you get your savings built back up again? This is a factor that also needs to be considered because your actual health is very important to not forget here.
When It May Be Beneficial to Pay Off Your Debt with Savings
A case where it might be beneficial for you to pay off your debt with money you have in savings would be:
- When you have your finances really organized and you know when all of your expenses are coming out of your account and due. You know exactly how much your expenses are and you are using a method of budgeting that works really well, not just for this month, but the next 3-6 months. This way you have your finances really dialed in and you know not just what is happening now, but what is coming down the pipeline in the upcoming months.
- When you have $1000+ (preferably more) money left in your savings after paying off the debt.
- When you have figured out your expenses for your upcoming months (a bare minimum of the next 3 months) and you have taken into account NOT just your fixed and regular expenses, but also your non-recurring and random expenses (car repairs and maintenance, home repairs, insurances, clothing, gifts, travel, etc.) and you won’t be going back into debt when those expenses arrive or having to take money from your savings account to cover them.
- You know that you are going to be having above average income coming in, in the next few months and you won’t be having any dips in income.
Make sure you are really evaluating your whole overall financial picture of what is happening now and what is coming up, before you decide to take money from your savings account to pay down/pay off debt.
If you are having difficulty organizing your finances, figuring out a budgeting system that works really well and planning your upcoming months so you know a much greater picture of your finances, I encourage you to read more about my Personal Finance Clarity Session. As a financial coach, I have helped many of my clients through this session to do just that and more.
Want to find out where you really stand financially? Watch my Pyramid of Financial Clarity video to find out!
Other Content You May Find Helpful:
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- How to Make Saving Automatic & Easy
- How to Plan Your Finances for an Entire Year (in under a couple of hours)
- Why You’ve Failed at Budgeting in the Past & How to Finally Succeed
- 9 Things You Are Spending Way More Money on Than You Think
- 3 Real Reasons You Are Overspending & How to Overcome It
Do you want to finally feel confident in how you are managing your everyday finances? Click here to download my free checklist!
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