Handling the Dilemma of Using Your Savings to Pay off Your Debt Load
Have you been managing your debt’s monthly payments, and building your savings simultaneously? It’s natural for the debt, wealth, and investment management dilemmas to impact your thoughts at some point in time. Finding the answer to them, however, is not the simplest of tasks. You need to be well aware of your financial situation, financial and investment management goals, priority factors that significantly affect your quality of life, and more.
Not only your current savings, but also your future earnings might seem like a tempting solution to your debt worries. So do you roll over your 401(k) into an IRA or savings account or liquidate your retirement fund to eradicate your current debt load? Here’s your guide to understanding when it’s right to dig into your savings to settle a debt score, and when you’d be better off managing debt and savings simultaneously.
Your savings could help in making your monthly payments more manageable
If your easy monthly installments (EMIs) are taking a toll on your salary and leaving you with just a few dollars at the end of the month, it makes sense to take some money from your savings to reduce your monthly debt payment liabilities. In this manner, you can ensure a sufficient free cash flow to manage your expenses every month. Also, such a course of action means that you can begin contributing the leftover cash from the month into a savings fund, once the objective of reducing your monthly debt payments has been achieved.
Use your savings to nail down debts at the beginning of the repayment tenure
Simply put, the longer you enable the debt to hang, the more you will end up paying in interest. The effect though is at its worst in the beginning of the loan repayment period. So, if you can manage to liquidate some savings and are able to decrease some of what you owe, you can undermine that interest hit substantially which will be better for you in the long run.
This means you can save for your future by avoiding some serious interest rate charges. This situation is not something you want to be in at all but sometimes even the sharpest financial minds and professionals find themselves in a financial situation that they do not want to write home about. You can always learn your lesson and make sure you do not repeat these same mistakes. With some financial maneuvering though you can eliminate some of those interest charges which can consume more money than you would make if you kept that money in your savings accounts and so on. It certainly is no fun taking money from your savings account, IRA, or having to sell some shares, but paying a high interest rate for months at a time is financially debilitating.
Hold on to your savings when the future’s volatile
If you plan on getting married soon, contemplating moving into a bigger house in a few months, are expecting a baby, or are hunting for the best college for your teenaged son, hold on to your savings and allow the debt to continue with the necessary monthly payments. Every significant life event is accompanied with some inadvertent and unavoidable expenses and this does not matter how well off you are, even millionaires have financial worry and take financial risk.
You just have to go with the flow and take the financial hits as they come. You can adjust how much you save every month and perhaps that next SUV can be pushed back one to two years but you can get through this situation without making any drastic steps.
Maintaining an emergency fund
If having a decent emergency fund is instrumental to your emotional well-being, do not touch your savings then and manage your debt repayments differently. Also, any investment management advisor would advise you to continue concentrating on your savings and investments if your debt is not too steep. If the interest rates on your loans are fair, there is no reason not to continue to invest in your future and for you to siphon off some of your money into an emergency fund that you feel is necessary for you to maintain and possess. No one said you had to eat out every night anyhow!
Article by: Benjamin Roussey, dbfchicago.com Writer