How Saving Helps Pay Down Debt

Paying off debt is a great goal, but many people give into an impulse to be rid of debt by depleting their savings. While this may seem like a great idea, over the long run it may actually hurt you more.

Mathematically, based on the interest rates of your loans versus your savings account (or other savings products), your debt is likely costing you more money every month than your savings is earning you. Thus, looking simply at the highest net impact of your dollar, it would make sense to use extra income to pay off debt rather than save the money.

But this strategy usually results in more debt. Crazy, right? But think about it. If you’re taking all your spare dollars and diverting them to your credit card or other loans, completely neglecting your savings account, what will you do when an emergency comes along–things like car repairs, vet bills, etc.?

Life happens, and since you don’t have a savings account, you’ll probably have to slap these expenses onto your credit card. You know, the one you’ve been working so hard to pay off. So how exactly do you break this cycle?
1. Put away the credit cards and stop adding to your debt.

2. Set a goal for your savings account that you’re comfortable would cover most emergencies–$500 may be a good place to start, but it will be different for everyone.

3. Pay at least the minimum payments on your loans while you build your savings account until you reach $500.

4. Then dedicate more money to paying down debt.

5. If an emergency comes along that takes your savings below $500, switch back to paying the minimum on debt and put extra money into savings to build that back up.

6. Once savings is steady at $500, and you feel you’ve gotten your debt under control, start increasing your savings. Most personal finance experts say an emergency savings should be able to cover three to six months of living expenses.

Along with this list, don’t stop contributing to your retirement savings or dip into your retirement savings unless it’s truly an emergency—your future self will thank you.

With patience and some baby steps, you’ll have your finances under control and find yourself resting on a comfortable nest egg. For more ideas on savings and loans, Liberty Savings offers free seminars and other resources. Ask in any branch for more info!

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