subject: Save Money Or Pay Off Debts [print this page] Save or Pay Off Loans and Credit Cards? Save or Pay Off Loans and Credit Cards?
Most people would love to live without any debt. We dream about the day we can burn or mortgages, drive a loan free car, and not owe a cent to credit card companies. Since that seems to be a distant goal, some of us dream about winning the lottery, or chucking everything to live in a shack in the mountains.
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 you really have to look at your debt. Some people should worry about stashing cash instead of reducing their mortgage or car loans. I cannot give everybody a right answer, but only say that it depends upon your situation.
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.
Look at high interest rate credit cards. It is not unusual to see 25% interest rates these days. If many Americans carry $8,000 in debt, that means they have to pay $2,000 just to service it. If you could reduce that interest rate to 12.5%, you could save $1,000 every year without working any extra hours.
Make Sure You Save Too
A savings account can keep you from having to borrow more money. If you have to take a kid to the dentist or emergency room, you will be happy to be able to right a check for your portion of the payment. I would not tell anybody to pay off all debt if it means they have no way to get cash.
Try to Stay The Course
You need to have a goal, and a way to reach that goal. Consider putting an extra fifty dollars toward paying off loans, and then allocating an extra fifty dollars toward your emergency fund. Even a modest amount is better than nothing.
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
If you are lucky enough to have a low rate mortgage, but a high return investment account, you will probably do better to leave things as they are. If you can earn 8% on your money, but only pay 6... on your mortgage, you may be better off by paying off your home the slow way.
Also consider taxes. You can deduct mortgage interest, but you have to pay taxes on your gains. If you really sit down and analyze your situation, you may be better off by keeping your loan payments in place but using extra money to higher interest debts, that cannot be deducted, as low as possible.
As usual, there is not one right answer for every person. You need to look at your own finances and come up with the best answers for your own situation.
by: Marilyn Katz
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