Yahoo Finance Should You Use All of Your Savings To Pay Off Your Debt?
Growing your savings into a healthy emergency fund that could get you through a few months with no income is probably the best financial feeling in the world — except for maybe being debt-free. But is it worth sacrificing the former to achieve the latter? Should you forfeit your savings to eliminate your debt and get a fresh start with nothing owed?
The answer, of course, is that it depends.
“There is no such thing as a one-size-fits-all debt repayment plan,” said Michael Jan Baldicana, a finance writer for Pyramid Credit Repair. “It depends on the person and their situation.”
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GOBankingRates asked the experts to help sort out when people might be justified in raiding their savings accounts to tackle a frustrating debt.
It’s Almost Never a Good Idea To Leave Yourself With Nothing
As Jan Baldicana pointed out, the wisdom of dipping into savings to tackle debt changes on a case-by-case basis — most of the time. Virtually every expert who spoke with GOBankingRates agreed on one foundational principle: With almost no exceptions should you deplete your entire savings to satisfy a debt.
Better options are almost always available, and if a crisis arrives when your savings account is bone-dry, your only recourse will be to borrow even more money — and borrowing out of desperation all but guarantees less favorable terms, higher interest rates and a brand-new mountain of inescapable debt.
“Generally, it is best to avoid using savings to pay off debt,” said Steven Walker, CEO of Spylix. “Because using savings to pay debts might put you at risk of going back into more debt.”
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Don’t Squander Savings for Good Debt. Bad Debt? Maybe
The first step in deciding whether to tap into your precious savings to whittle down debt is to identify the debt as toxic or healthy, bad or good.
“Good debts benefit us in the long run and enable us to gain something,” said Jason Cordes of CocoLoan. “Student loans, for example, assist students in obtaining a good degree, which leads to good job placement.”
This kind of debt — which also includes mortgages — generally comes with lower interest rates and lenders who are more willing to work with you if you get into trouble. In most cases, therefore, you shouldn’t raid your savings to pay off good debts.
On the other end of the spectrum is bad debt, like the kind you owe when you use your credit card — and bad debt can ruin lives.
“In this case, your financial situation will determine whether or not you should use savings to repay your debt,” Cordes said. “If you have enough savings in your emergency fund, you can use savings to repay the loan, but you should avoid doing so if you don’t have enough for future uncertainties.”
When Debt Is Dangerous, Savings Are Fair Game
There’s bad debt and there’s really, really bad debt. The worst kind of debt is comparable to legal loansharking and must be dealt with right away at almost all costs.
“While it’s a general rule of thumb to continue growing your savings while paying off debt, the type of debt helps determine whether you need to touch your savings to pay them off or not,” said Nunzio Ross, a personal finance expert who went on to found Majesty Coffee.
Savings, after all, are what you’ll rely on if an emergency strikes — but if you’re being crushed by triple-digit interest from a short-term predatory loan, you’re officially in an emergency.
“High-interest debts like payday and car title loans should take priority, and you need to put as much money into these debts to pay them as soon as you can,” Ross said. “Low-interest ones, such as mortgages and federal student loans, still need to be paid regularly, but they are not as pressing if you are still building your emergency or savings funds. The higher the interest rate, the quicker you want to finish paying them off.”
How Much Do You Have? How Much Do You Owe?
Nearly all of the experts agreed that much of this debate comes down to the amount of debt you’re trying to erase vs. the amount of money you have saved. If your savings account consists of a few hundred bucks that will be able to cover only the most modest of car repairs, yet you owe thousands or tens of thousands of dollars in debt, don’t squander what you have — it won’t even make a dent.
If the situation is reversed, however, and your savings account is flush but you’re staring down the pesky remnants of a lingering debt that you could wipe out with one shot, in most cases, you should go for it.
Although Walker agrees with the consensus opinion that every situation is different and there is no hard-and-fast rule, he offered a few scenarios in which it is almost never a good idea to pilfer your savings account to pay your debts:
You don’t have an emergency account that is fully funded.
You have trouble paying your bills every month.
Your debt carries low interest rates.
You have not started saving for a long-term goal.
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This article originally appeared on GOBankingRates.com: Should You Use All of Your Savings To Pay Off Your Debt?
