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Should You Save or Pay Off Debt?

February 3, 2012 | Debt | Education | No Comments

So you have a little extra cash and you are wondering if you should save it or pay off debt.  Paying off debt should be your priority; however, if you have absolutely no savings, you should first try to save at least 3 month, preferable 6 months, of your salary in the bank.  This cash is needed for any emergencies that may come up unexpectedly such as not being able to work due to illness / injury or losing your job.

It’s unfortunate, that over the past 2 decades U.S. citizens have accumulated more debt while saving less. (See chart above). It’s imperative that as soon as you have some cash reserves that you pay off your debt.  For most people this will be credit card debt.  It makes absolutely no sense having your money in the bank making 0.5% in interest while you are paying 15%+ on your credit card balance.  Paying that much in interest is like a leaking facet just wasting water.

If you are contributing money to your 401K or IRA, it’s a good idea to temporarily stop contributing and use that money to pay off your debt.  The interest you will earn in your retirement account will be offset with the high interest you are paying off with your credit card.

If you have multiple credit card, pay off the card with the highest interest first.  Be aggressive by cutting as much expense you can to pay off high interest debt.  If it means cancelling or reducing your cable TV, cell phone, gym membership, eating out, etc., do it.  It will be temporary until you get your debt paid off.  In the long run, you’ll benefit from the temporary sacrifices.

When your financial situation improves, you can then start to contribute to your savings and retirement accounts.  If you pay the minimum due on your credit card debts, it will take you months or years to pay off those debts and you will pay hundreds or thousands of dollars in interest.  

Other techniques you can use to get out debt are:

  • Negotiate with your creditors:  Creditors don’t want you to stop making payments.  If you explain to them that you can no longer afford to pay, they may be willing to lower your monthly payments and/or interest rate.
  • Increase your income:  You may get a second or part-time job or start a side business.  You may also try to gain work extra hours (overtime) at your job.  If your spouse doesn’t work, it maybe a good idea for her/him to find a job.
  • Consolidate your debts:  Debt consolidation is borrowing money at a lower interest rate to pay off higher interest debt to ultimately pay off your debt faster and to save money.
  • Getting help:  There are many nonprofit credit counseling agencies that can help you to develop and maintain your budget.  They may help you set up a debt management plan.
  • File for bankruptcy:  This should be your absolute last option.  However, bankruptcy maybe your best option if your monthly expense are extremely higher than your expenses that it will take decades living on a bare-bones budget to pay off your debt.  You must consult with a bankruptcy attorney to determine if you should file for bankruptcy and which type you should file for (Chapter 13 reorganization which gives you 3-5 years to pay your debts or Chapter 7 liquadation which eliminates most of your debts.


If you are looking for a good bank savings account, consider Aurora Bank.   Visit for more information to improve your financial literacy and education.





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