A recent MSN Money article took the time to review 5 questions that one might consider when deciding whether or not to save or pay off debt. Sometimes it can seem like the choice between saving money and paying off debt is six one way, half dozen the next. I mean, it's like I'm saving money so that I can pay bills or I'm paying bills now so that I can save money down the road. But this isn't always the case. I've had my own experience with this financial dilemma and have found that -- at least in my particular situation -- deciding to pay off debt rather than stash my cash worked for me.
The overall interest rates associated with debt and certain savings vehicles can help make the decision clearer as to focus on one or the other. In our situation, we had a mortgage upon which we were paying 5.25 percent interest. While this might not seem like a lot compared to many credit card interest rates, it was much more than the measly percent or two that we could get from things like certificates of deposit, savings bonds, or a high interest savings or checking account. And while we could have taken a chance with our money in hopes that we could beat this rate in the stock market, such an investment would not have resulted in a guaranteed return like putting money toward our mortgage did.
Bill Magic: Poof! They're Gone!
When I save money, I create a cushion with which I can pay debt and bills. However, once that debt is gone, some of those bills disappear, and then I don't need as much in savings to survive should my income suddenly go away. It's kind of like bill magic. Once I pay my debt off, and I keep it that way, it's like "poof", those bills are gone and my expenses drop dramatically.
For example, once we paid off the mortgage on our first and relocated to a place we cold afford to buy outright, we replaced our $1,350 a month mortgage with a $300 association fee. That's an additional $1,000 a month that we no longer had to worry about.
A Guaranteed Return
As I mentioned, we could have tried to beat our rate of return we were receiving by paying down our mortgage by putting our money in the stock market. And we might have done so. However this wasn't a guarantee. And getting a 5.25 percent return on our money was nothing to scoff at. Therefore, we took the safer route and paid off debt.
Had we credit card debt or other high-interest debt, we would likely have put our money toward that instead of extra mortgage payments since we would rather have paid off debt with a rate of say 18 percent for example than 5 percent.
Peace of Mind
There is also the peace of mind that comes with being debt free. While savings are nice, and I can't deny that having an emergency fund certainly provides me with some great financial security, cutting the amount that we much pay each month whether we have the money or not is equally satisfying, if not more so.
Owning our home outright for example means that whether we lose our income or not, we'll have a place to live that won't be taken by the bank. However, if instead we just had an eight month emergency fund in place, if we hadn't recovered our income in this time, we could end up not being able to make the payments on our home and be in danger of losing it. Therefore, I find that there is some additional peace of mind in being debt-free, and if I can pair that with having a decent emergency fund as well, the peace of mind is even greater.
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The author is not a licensed financial professional. The information provided in this article is for informational purposes only and does not constitute legal or financial advice. Any action taken by the reader due to the information provided in this article is solely at the reader's discretion.
Palmer, Kimberly. MSN Money. "Should you save or pay off debt?" January 29, 2013. http://finances.msn.com/saving-money-tips/250422113. March 5, 2013.
- Banking & Budgeting