At Super-Advice we are about all things financial, but more importantly, helping people understand so they can get ahead financially.
Debt is a common financial burden that many people will face at some point in their lives. Whether it’s a credit card debt, a buy now pay later, a student loan, a vehicle loan, a personal loan or a mortgage, carrying debt’s gonna be stressful and it’s gonna be costly. On the other hand, having savings is essential for financial security and emergencies.
So when faced with the common question of whether to use your savings to pay off your debts, it’s crucial to carefully evaluate your unique financial situation. I want to share some factors with you to consider before making a move here.
Start by examining the interest rates on your debts and the returns on your savings
If your debt carries a high interest rate, like credit cards, could be 20 percent or more, it often makes sense to use savings to pay it off. You’ll save more money in the long run by avoiding those high interest charges.
Have an emergency fund
Having an emergency fund, we love this one, before using your savings to pay off your debt, ensure you have an emergency fund in place.
Having savings equal to three to six months worth of your living expenses will provide a financial safety net in case of unexpected expenses or even job loss. If you don’t have an emergency fund, consider building one aggressively before paying down debt and then pay down the debt aggressively.
The Type of debt
Not all debts are created equal. Low interest tax deductible debts, depending on what government, or student loans, may not warrant tapping into your savings. In some cases, it may be better to continue making regular payments and invest your savings in assets with potential for higher returns.
There are, of course, Psychological benefits.
Being debt free can offer peace of mind and reduce financial stress, and financial stress is real. I mean, if the psychological burden of debt is affecting your well being, using your savings to become debt free is going to be worth it.
Even if it’s not the most financially optimal choice, having good health is always the best choice.
A balancing act
Striking a balance between paying down debt and saving is absolutely key. You don’t have to completely deplete your savings to pay off your debt. Consider a middle ground where you can make extra payments while still maintaining some saving for your emergency fund.
What are your financial goals?
Assess your long term financial goals. If you’re saving for retirement, which you should be with KiwiSaver, a home purchase, which you should be, or other significant milestones, be mindful of how using your savings for debt repayment may impact these important goals.
That’s a wrap
There is no one size fits all answer to whether you should use your savings to pay off your debts. It depends on your individual financial circumstances and your goals. It’s often wise to consult a financial adviser who can provide you with personalised financial guidance based on your own situation.
Remember the journey to financial stability and freedom is a marathon. It is not a sprint. And striking a balance between saving and debt repayment is your key to achieving your financial aspirations. We don’t like debt at all, so don’t even use it.
If you need any financial help or advice please get in touch with us at Super-Advice.