Should You Invest In Savings Or Payoff Your Debts?
I have faced this financial question 8 years ago and recently I have friends asked me this same question. I think I should write it up so that it may help some of you that having the same situation.
The decision whether to invest your monthly excess cash into savings account or paying off your debt is a tough one.
There are few factors you need to consider before you make the decision and I listed them down here to help you make an informed decision.
(1) Rolling or fix installment credit account
An example of your rolling credit is credit card. You may continue to add debt into the account while trying to pay off the debt. It is always recommended to pay off your rolling credit before putting into savings account. You should pay more than the minimum payment every month.
Other than paying more than the minimum amount, you should take the following recommended actions immediately to avoid deepen your debt:
(a) Putting your credit card away, keep it at home and don´t carry whenever you go. I actually locked the credit card for months when my debt was reaching the un-tolerate level.
(b) Be frugal. Dont buy unnecessary. Be disciplined. I actually print out big words of ‘Be Frugal’ and stick them around the house. In the bath room, bed room, dining hall. I even carry a small ‘Be Frugal’ card in my wallet and I will see it when I take money out of my wallet.
(c) Get expert advice. If the debt is too deep and out of control. It is advisable to seek an expert advice
(d) Borrow money from your friends and relatives to payoff the high interest rate c^redit card debt
(e) Payoff the high interest debt with a lower interest personal loan
For the fix installment debt, in some cases you will be penalized if you pay off the loan faster. In this situation, you may want to invest your extra cash into savings
(2) Interest Rate
It is clear that you should pay off your higher interest rate debt than putting your money into savings with lower interest rate. This is not a fix rule, many experts recommended that you should save between 5-15% of your monthly income into savings. You should also save at least 3-6 months worth of monthly spending for emergency use. You have a decision to make between building your nest egg and paying off your debt faster for long term financial health.
(3) Debt Ranking
List and rank all your debts according to the interest rate. Always pay more than the minimum for the highest Interest debt and pay the minimum for lower interest Debts.
In summary, you should balance between building your cash reserve (for emergency use) and paying off your debts. There is no one fix formula for all. Make your own analysis and find out the mix that suit your situation considering the interest rates, debt ranking and whether it is a rolling or fix installment debt.
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