Saving or Paying Off Debt, What’s More Economical?

Saving and Paying Off DebtWhen you were young, your parents always explained why it is important for you to save for your future. As you grew older, financial institutions, banks, and even the government backed up your parents’ claim. This is probably why you’ve always felt guilty every time you pay your bills from personal loan companies like without setting anything on the side. But, is it really more economical to save?

The Debt Dispute

Visualize a family that got a USD 1,000 debt and has a USD 1,000 savings on their bank account. The interest rate on the debt is 19 percent, so the debt will cost you around USD 190 yearly. However, the interest rate on your savings account is only two percent gross, so your yearly savings is USD 20 without tax.

This just means that the family pays out more on the debt than what it gains from the savings. It is more economical if they used the money they saved to pay for the debt. If you need help with the calculation, can examine your financial needs.

The Debacle on Interest Payments

The interest rates on overdrafts, credit cards and personal loans are typically high. It will always be more pricey to borrow cash than to save. It is important for those who have savings, but also has high debts to use some of their savings to settle their debts. It will be practical to clear costly debts first and look out for the penalties.

For instance, if you have a personal loan, you will incur various months’ interest once you decide to pay off your debt before your loan term ends.

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The Cash Cushion

Most individuals are unwilling to use all their savings just to clear their debt because they feel vulnerable not having a cash cushion for emergencies. But, most experts disagree claiming that your emergency funds will cost you. In case something happens, you can always get another loan because you probably already saved cash on the interest payments.

The key here is to know where your priorities lie. It’s better you settle the bills early than to risk paying off penalties.