Quote:
Originally Posted by stevie667
If you have outstanding debts, you can pay off some of it with your savings, but do keep a nice 3-6 month wages reserve as others have said.
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This is good advice, except I would suggest that it isn't "you can," it's "you should."
Even "good" debt can be at an interest rate of 6% to 8%. And bad debt? As much as 18% to 22% (or more).
Tell me this: What is the point in holding savings when you're also holding debt? The only good reason I can think of is if you needed access to the savings in the short term. Otherwise, the savings should be used to pay off debt.
Why have a chunk of savings (let's say, $1,000) earning a paltry 3% when you have the same amount of debt that charges you 18%? Your net interest burn on that dollar value is 15%. You are essentially losing 15% of your wealth compounded daily.
The numbers:
$1,000 savings @ 3% = $30 earned in one year
$1,000 debt @ 18% = $180 charged in one year
Net interest burn = $150 for the year
Why not just use the savings to pay off the debt? The main legitimate answer would be if you thought you might need the cash in the short term. But if you were to use the cash to pay off the credit, couldn't you just use that same credit room if something did come up? What if nothing comes up? Is that worth $150 per year, $12.50 per month?
Even if you were to grow your savings to five times the value at $5,000, you'd still be earning less interest than what you'd be paying in debt interest. It would be $150 per year—still $30 short of your interest expense. Yes, you'd still be losing money even at a savings value of five times greater than your debt load. Suddenly you're looking at a lot of money going to your lender, and for what?
Tell me, how many investments do you know can earn anywhere near 18%? And if you do know of any, how many of them are as risk-free as the risk of somehow "losing" your debt from forces outside of your control?