Is It Better to Repay Debts or to Save Them?

Once you finish college, get a stable job, find a place to live and start earning enough money a question inevitably comes up: “Should I start paying off my debts with the money that is left over every month or should I start saving up and then pay my debt once I have a substantial amount on my account?”. The short answer is that you should try and pay off as much of your debt before you start saving money. The long answer will include the “why” as well as the “what” you should do.

You see, it is all in the percentages that keep building up the amount of money you either have on your account or you owe. For instance the money you have in the bank will have a very low interest rate, around 1%, while the interest rates on your debt can be anywhere between 5% and 21%, maybe even higher. So in the best case scenario your debt is going to get bigger for about 4-5% every month, so when you get enough to finally pay off the original debt, the amount that you actually have to pay then will be much greater.

If you have some money on your account right now, you should consider using as much of it as you can part with to pay off those debts with the highest interest rate first of all.  Therefore you should take a look at your current debts, and mark the ones that cost you the most every year and focus on repaying them with the money you have saved – just leave enough money for your basic needs so you won’t have to take out another loan down the road.

There is something you should be aware of when trying to pay off your debt using your savings – not all debts can be cleared away efficiently using this method. For instance, certain types of mortgages will have actual penalties for paying before the set date. The best solution in this case is to take a part of your savings and put it into a different account that is specifically designated for the purpose of paying off the mortgage. The interest will keep building up and when the right time comes you can then use it to pay the debt. Be sure you are well informed about all the circumstances regarding your debt and read everything carefully before you sign.

Be sure you keep your credit cards after you have payed them off in full, you will have a relatively good credit rating if you occasionally buy something with them and then pay it off quickly afterwards, and you can also get an interest free deal on a card and pay it off before the interest free period runs out. This will help you in case something unexpected comes up and you have used up all your savings.

There you have it, the short and the long answer. The advantages of paying off your debt first should be pretty obvious now – you will want to avoid letting the interest rate blow up and paying as much as you can right now.