Pay Off Debt Or Save

When faced with high debt, may consumers are confused: should they pay off their debt, or should they put excess cash into savings? In order to answer this question, it is important for consumers to evaluate the type and amount of debt they face.

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First, what kind of debt have you accumulated? Rolling debt, such as debt incurred through credit card use, can add to your debt even while you make payments. Before saving, you should always attempt to pay off rolling debt. Pay more than the minimum each month, but more importantly, do not add to your debt. Put your credit card away, and practice frugality. At the same time, look for less expensive ways to fund your current debt, for example, borrow interest-free from family members or pay off the high-interest debt with a lower-interest personal loan.

For cases of fixed debt, in some instances you can be penalized for paying off the loan too quickly. If you face such debt, you might want to make the necessary fixed payments on the debt, while putting the rest of your excess cash into savings.

Second, take a look at the interest rate. While, as a general rule, it is recommended that you pay off higher-interest debt rather than saving at a lower interest rate, you also want to ensure that you meet recommended savings rates (some experts say that you should be saving 5 to 15 percent of your monthly income and should accumulate a few months' worth of savings for emergency situations). It is sometimes helpful to rank your debt by interest rate, paying off the highest first, while only putting the minimum toward the lowest. At the same time, continue to accumulate as much of a cash reserve as possible.

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