So, you’re in a situation that seems to be leading to your debt getting out of hand—but you have enough money in your savings account to pay it off. Yes, it’ll take your entire savings account to kill it, but at least it will be dead.
So, here’s the $100,000 question; should you use savings to pay off debt?
A lot of experts would say it’s a good idea. After all, you’ll pay more in interest than you would earn from the savings account. Still though, before you make that decision, it’s important to ask yourself the following questions.
How Will I Handle Financial Emergencies?
If you empty your savings account to eliminate the debt and an emergency situation comes up, you’ll have to go right back into debt to deal with it. If you then can’t cover the minimum payments and late fees start to accumulate along with the interest, you’ll be underwater again—with no cushion at all in the event of another untoward situation. Before you consider using your savings account to eradicate credit card debt, you’d be wise to set aside an emergency fund.
Are There Any Windfalls on the Horizon?
Maybe you’re expecting a nice tax refund check or your bonus from work is coming soon. Perhaps there are items around the house you no longer need you can sell. Or, said differently, perhaps their things you need less than having your debt cleared up. If this is the case, hold off on using your savings until these funds are available and use them to get the debt better in hand. With that said, however, if the money is guaranteed and you need to deal with the debt right away, you can take that amount from your savings and use it to pay down the obligation to make the monthly payments more manageable.
What Are My Ultimate Financial Goals?
If you’re close to retirement or some other event that will require you to have an abundance of liquid cash, paying off the debt with that money is probably not a good idea.
If the cash is being saved to build up a down payment for a home, using part of it to pay down the debt might be a good idea. You’ll qualify for a better interest rate if your obligations are lower. This could save you a lot of money over the course of the term of a mortgage, even if it’s only for 15 years, rather than the customary 30. Plus, paying down the debt could give you more room for the mortgage payment in your budget.
What Other Options Do I Have?
If your credit rating is strong, you might qualify for debt consolidation so you can combine all of your obligations into one—with a lower monthly payment and a better interest rate. This can make your debts more manageable so you can maintain your liquidity.
If the situation is really bad, like say you’ve missed payments and late fees plus the associated interest rate bumps have pushed you beyond your ability to pay, you might consider working with a debt settlement company like Freedom Debt Relief. These firms can help you negotiate lower payback amounts to close out the accounts altogether. Whatever you decide to do, it’s important to move on the problem as soon as possible. The longer you wait, the worse it gets. The most powerful force known to humankind is compound interest. The more time you give the interest to accrue, the tougher it will be to eradicate the debt.