Save Money or Pay Off Loans? 

By Melinda Torbay | September 26, 2009

Debt or Savings?

I guess most of us dream about living without debt. If you are like me, you sit down and pay bills, and think about how much money you would have if you did not have to service credit card bills, car loans, or a mortgage. Maybe a picture of a shack on an island even comes to mind.

Have you ever thought about end of the world movies and stories? I think that people like them because they can picture a life without debt, even if something really awful has to happen.

But are we better off without debt, or should we had onto cash? I think the answer is complex, and like most things in life, it depends.

Move Credit Around

Even if you cannot totally cut your debt, you may be able to reduce it. Look for refinance offers, or offers to transfer your credit card bills to a lower rate card. If you can reduce your interest rate by a couple of points, you may save lots of money every year.

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.

Make Sure You Save Too

If you do have debt, I still think you should keep an emergency cash fund. If you do need to spend some money in an emergency, you could have to borrow money on worse terms, and so paying off your old debt may not do you much good.

Stick with a Plan

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.

Evaluate Loans vs. Investments

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.

You also have to consider the impact of state and federal income taxes. If mortgage interest gives us a deduction, it might work in our favor. So even though we have to pay interest on the money, the actual rate is lower when we consider the tax deduction.

We can help you Transfer Credit Card Balances to reduce your monthly payments. We also provide free on line money calculators to help you make the best financial decisions.

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