What it Really Means if You Have Savings and Debt
January 19, 2021
Having a robust savings account feels good. Especially in these uncertain times it can be reassuring to know that you have money available if something, such as a job loss or a medical emergency, threatens your financial future. However, savings is only part of your financial picture. To truly assess your financial health, you need to look at both your savings and your debt.
Your Full Financial Picture
When many people look at their financial picture, they feel satisfied to know that they have a good income, their bills are paid monthly, and they are contributing money to savings. They may have some debt, but because the rest of their finances seem orderly, they don’t think it’s anything to be concerned about. In reality however, the net worth of your savings is the amount of your savings that is left after you subtract your debt. Say you have $20,000 saved, but $30,000 in debt, you actually have zero savings, and $10,000 in debt. Although there are “good” debts and “bad” debts, neither kind is good for a successful financial future. Once you’ve realized this, one of your goals should be getting out of debt for good.
When to Prioritize Saving
If you have a zero percent loan, taking money from your savings to cover it doesn’t really make sense. Money in your savings will accumulate interest, while your debt isn’t growing with zero interest attached. Your debt is a burden on your current income, but since it isn’t “costing” you anything additional, it makes sense to keep your savings intact and use as much of your current income you can spare to pay off the debt more quickly. On the other hand, if you are paying interest on debt, you may want to consider using some of your savings to get rid of it. Approaching your debt and determining how to tackle it can be a balancing act. You never want to completely deplete your savings, even in the event of paying off a high interest loan or credit card balance. If you have no savings at all, an emergency could require you to take on additional debt, and you may end up worse than where you started.
You can save first and pay your debt later if:
- Your debt has a zero interest rate.
- You do not have adequate emergency savings.
When to Prioritize Debt Payments
In many cases, experts recommend getting out of debt before focusing on savings. Most credit card debt has high interest and the longer you put off repayment in full, the more it will cost you. If you have basic emergency savings and debt that carries any interest higher than what you can make from a savings account, focus on taking as much of your income as possible to pay off that debt.
Is Getting Out of Debt Worth Sacrificing Your Savings?
Yes. Sometimes. But there are many factors to consider.
You need to find the right balance for your own unique situation. In most situations, eliminating all high interest debt is an excellent use of your savings. There is no savings account that will make as much money for you as you will save from not paying high interest on debt. When you’re speaking of “bad” debt, many experts suggest leaving a very small amount in savings, usually $1000 initially, while taking everything else from your savings to throw at the debt.
Once the debts are paid, focus the money you were paying toward the debt to regrow your savings. A good goal for an emergency fund is typically saving enough to cover your living expenses for three to six months. Once that emergency fund is established, the money can be redirected to other savings goals. You will sacrifice your savings in the short term, but eliminating the debt payments will quickly free up money to rebuild your savings in the long run.
Every situation is unique. What works for one family may not work for another. The best thing that you can do to assess the health of your financial situation is to speak with a financial consultant you trust who can walk you through the options you have and ensure that your financial security is strong. At Safe Money Partners, we have proven ways of helping people get out of debt for good. Contact us today for more information about how we can help direct you toward a successful financial future.
By Jeff Mohlman