Pay Off Debt Now, Save Later

By January 28, 2013Debt

Admittedly, having a savings account feels pretty good. Despite debt or other financial trouble, it can be comforting to know that you have a cushion if you need it. But if we are being completely honest, that “cushion” creates a false sense of security. It may be unnerving not having that emergency cash fund, but if you’re paying a lot of interest to carry debt and earning very little on your savings account, you’re losing money.

Paying off high interest debt puts more money in your pocket in the long run than a savings account. The average interest rate on a credit card is around 18 percent; a savings account may have an interest rate of one – maybe two – percent if you are lucky. Unless you have an extraordinary amount of money in your savings account, the added interest is not going to make a difference. Of course, if you do have that kind of money, you probably aren’t struggling to pay off credit debt.

If you are placing money in a savings account rather than making credit card payments, you are actually losing money. Take this example: If you put $5,000 in a savings account earning two-percent interest, you’ll earn $100. If you have a $5,000 balance on a credit card with an interest rate of 12 percent that you only pay the minimum payment on, you would pay $459 in interest each year. Worse, it would take you 33 years to pay off the credit card.

If you absolutely must have some sort of emergency fund, paying off your debt is still the best way to go about achieving that goal. Rather than tucking cash into a savings account, you have the ability to pay off your credit cards. A credit card is a perfectly good source for emergency funds when it isn’t maxed out, and when you no longer have a credit card bill, the money you save can then be put into savings.

This is not an excuse to charge every possible item to credit cards for the sake of “saving” money. Everything should still be done in moderation, employing a strict budget and only purchasing items that you need. Your funds should be used, not as savings, but for your necessary expenses and for repaying your debts. Once you have established a debt-free lifestyle, you can begin accumulating a true cushion to help you stay debt-free. Financial strategies will help minimize credit debt, and several Ovation tools are available to aid you in accomplishing your goals.

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