Debt or Savings?

I guess most of us dream about living without debt. If you are like me, you sit down and pay bills, and think about how much money you would have if you did not have to service credit card bills, car loans, or a mortgage. Maybe a picture of a shack on an island even comes to mind.

I really think that those end of the world books became popular as an escape. Even if something awful happens, like a zombie invasion, it would still wipe out all of our creditors too.

But are we better off without debt, or should we had onto cash? I think the answer is complex, and like most things in life, it depends.

Move Credit Around

Maybe you can improve your debt situation even if you cannot eliminate it. It is tough these days, but many people can still find offers for better interest rates for credit cards. Even a few percentage points lopped off, can save you hundreds of dollars every year.

Try to pay off high interest credit cards if you can. Some credit rates are just crazy these days. People are getting notices that their rates are rising to 25 percent or more! Even a fairly low balance of $4,000 can cost $1,000 a year just to service!

Do Not Neglect Savings

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.

Stick with a Plan

Everybody who has managed to reduce their debt has stuck with a plan. But do not make the plan so strict that you cannot stick to it. You will do better putting aside an extra fifty dollars to bills or savings than to NOT put aside $1,000.

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.

Consider Returns on Credit and Savings

A person with a lower interest rate on their home, but who also has a higher interest rate savings account, may do better by paying off their mortgage the slow way. If they pay six percent on a home loan, plus get a tax deduction, this will probably be better than breaking into a high rate investment account.

Also consider taxes. You can deduct mortgage interest, but you have to pay taxes on your gains.

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