Savings versus paying off debt
Why is debt bad? In my opinion, there’s one simple reason: the money used to pay off the debt on a monthly basis can better be used towards…you. The money that is going towards your debts can be better used on anything other than the debt itself. You can save the money for your future goals, a vacation, or a new horse. A new horse? Shhh, I’m on a roll.
I received this question on my Facebook wall the other day:
We put $400 each month in savings for our emergency fund. We currently have enough money saved up to pay bills for 2 months should anything happen. However, we also have $5000 in credit card debt (way down from the orignal $8000 just a year ago) and 3 years left to pay on a vehicle loan. Should we use any of our $400 per month we put into savings to pay off one of our debts? If so, which should we work at paying off first…the credit card or car loan?
If this person handles the situation correctly, then they will be out of debt in about 5 months. If they handle it incorrectly, then they will pay HUNDREDS of dollars more in interest. They need to IMMEDIATELY stop saving money, and start focusing on debt. That $5000 debt is holding the monthly debt payment hostage. A follow-up comment from this person informed me that they are paying $250-$450 per month towards the credit card. Therefore $5k is restricting up to $450/month. The faster the $5k is gone, the sooner this person can use $450/month towards something else. And per the wall post, they would be best served to use the money towards their car payment. Let’s assume that the car payment is $300/month. That would mean that this person will be able to start making car payments of $1150/month, once the credit card debt is gone. They will be able to pay off their car in one year versus three years. And by the end of all of that, they will be able to save $1150/month towards their financial goals. And that’s how it’s done. Bang.