Save Money or Pay off Debts
Author: Marilyn Katz

Save or Pay Off Loans and Credit Cards?

Most people would love to live without any debt. We dream
about the day we can burn or mortgages, drive a loan free
car, and not owe a cent to credit card companies. Since
that seems to be a distant goal, some of us dream about
winning the lottery, or chucking everything to live in a
shack in the mountains.

Have you ever thought about end of the world movies and
stories? I think that people like them because they can
picture a life without debt, even if something really awful
has to happen.

But you really have to look at your debt. Some people
should worry about stashing cash instead of reducing their
mortgage or car loans. I cannot give everybody a right
answer, but only say that it depends upon your situation.

Move Credit Around

Even if you cannot totally cut your debt, you may be able
to reduce it. Look for refinance offers, or offers to
transfer your credit card bills to a lower rate card. If
you can reduce your interest rate by a couple of points,
you may save lots of money every year.

Look at high interest rate credit cards. It is not unusual
to see 25% interest rates these days. If many Americans
carry $8,000 in debt, that means they have to pay $2,000
just to service it. If you could reduce that interest rate
to 12.5%, you could save $1,000 every year without working
any extra hours.

Make Sure You Save Too

A savings account can keep you from having to borrow more
money. If you have to take a kid to the dentist or
emergency room, you will be happy to be able to right a
check for your portion of the payment. I would not tell
anybody to pay off all debt if it means they have no way to
get cash.

Try to Stay The Course

You need to have a goal, and a way to reach that goal.
Consider putting an extra fifty dollars toward paying off
loans, and then allocating an extra fifty dollars toward
your emergency fund. Even a modest amount is better than
nothing.

But if you plan to use $500 to pay off debt, and then never
get around to actually doing it, you will not help yourself.

Evaluate Loans vs. Investments

If you are lucky enough to have a low rate mortgage, but a
high return investment account, you will probably do better
to leave things as they are. If you can earn 8% on your
money, but only pay 6... on your mortgage, you may be
better off by paying off your home the slow way.

Also consider taxes. You can deduct mortgage interest, but
you have to pay taxes on your gains. If you really sit down
and analyze your situation, you may be better off by
keeping your loan payments in place but using extra money
to higher interest debts, that cannot be deducted, as low
as possible.

As usual, there is not one right answer for every person.
You need to look at your own finances and come up with the
best answers for your own situation.


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