Have you looked at interest rates recently? I mean, local brick and mortar banks are offering less than half a percent and if you check out banks like Citi, Bank of America and Chase, you’d be lucky to earn 10 cents on 100 bucks. Don’t get me wrong, I’m all for saving money and keeping a nest egg available for emergencies, but when your money isn’t making its own money, a change is needed.
With the economy struggling to push through the recession, investments are shaky at best. CD rates are low, bank rates are even lower and the stock market has its good days and bad. Rather than risk your money in a small, non-guaranteed return, now is the time to take your extra funds and pay down any debt you might have. This means putting more toward your mortgage, more toward your car loans, credit cards and any other possible debt you have. Allow me to explain why this is the smart thing to do.
(1) Debt Costs More Than Investments Earn – A typical mortgage rate is between four and seven percent, with some instances costing consumers much more. Did you know that if you take out a 30-year mortgage with a 5% interest rate for $250,000, you’ll end up paying back nearly double of your original loan. That means $250,000 in interest is lost over 30 years. However, by paying your mortgage down early, say $500 a month, you not only knock down your principle, you save tens of thousands in future interest payments. Car loans and credit cards generally have a much higher interest rate too, so make sure you start with the highest interest rate and work your way to the smallest.
(2) Psychologically, Debt is Crippling – I can draw from experience on this one, as I’m currently working my way through a massive amount of debt. Early in the process, I just couldn’t think of how I was going to pay off more than $225,000, but that’s the wrong approach to take. The biggest hurdle to paying down debt is actually paying down debt and if I had the choice of having $100,000 in a savings account, or paying off $100,000 of my debt, the latter would be done in a split second. Ask anyone who has a lot of debt and they’ll tell you that sometimes, it’s all they think about. Paying down your debt not only saves you money, but it also saves your mind.
(3) Your Credit Score Will Thank You – Savings accounts have no bearing on your credit score, so even if you save thousands of dollars a month, your credit will not improve. However, if you pay down your debt, you will effectively show creditors that your life is becoming more stable, and they’re more willing to lend you future credit. A credit score is dependent on a number of factors and your debt to credit ratio is a big one. Paying down debt now will not only save you on future interest payments, but it will lower your future interest rate.
Debt sucks. There’s no nicer way to say it, but debt also provides an opportunity to test your budget and your financial prowess. Rather than earn next to nothing in a savings account, consider taking your extra cash each month and using to pay down as much debt as possible. Not only will you see future results, you’ll feel immediate ones too.
Published or updated April 21, 2011.