People are funny. We donít always do whatís best for us instead we do what feels best and try to suppress any reasons why it may not be the best thing to do. Perhaps thatís why there are so many people that have both savings and debts.
Itís Simple Psychology.
It just feels better to save. In saving you feel like you are laying a foundation for the future, whereas on the other hand paying off debt almost feels like throwing your money away. Youíre saving that money for improving your house, or for the kidsí education, or suchlike, in an account with a decent rate of interest. What could possibly be wrong with that? Plenty, if you have debts.
Donít Be Foolish.
There are pretty much no savings accounts that will offer interest rates as high as what the credit card companies charge.
Hereís an example:
Say have $10,000 in a savings account at 5% per year
$5,000 on a credit card at an interest rate of 20% per year
How much money do you boast?
After as little as five years, the answer is effectively $0 Ė your debt will have grown to around $12,000, the same total that your savings are now worth.
Itís difficult to accept as true right now, but it really is much healthier to pay off your debt. If you used half your savings to pay off that debt, youíd be in such a better place. You avoid five years of interest on the debt, but you still get to keep that $5,000 in your savings account, earning interest and after five years, thatís about $6,180.
If youíd still prefer to keep your savings intact rather than using them to pay off your debts, ask yourself this basic question: is your pride worth $6,380 of your familyís money?
Think of Your Financial Future.
When you have money enough to pay off your debt, thereís entirely no reason to keep it. Debt is for people who donít have the money, and need to borrow it. Debt costs money, and savings make money Ė you want as much of your finances as achievable to be savings, not debts.
If your savings account and credit card are from the same bank, then youíre in effect paying for the opportunity to borrow your own money from them. How ridiculous does that sound?
By paying off your debt with savings youíll also be less stressed about your debts, and your credit report score will rise Ė getting you a much better interest rate if you ever need to go into debt again.
It can be tough. You just have to keep in mind that any money youíve Ďsavedí hasnít in reality been saved at all. Itís money you should have been spending instead of making purchases with a credit card.
Of course, it feels bad to spend money thinking that youíre spending away your future Ė but always bear in mind that when you use a credit card to spend that same money, youíre spending away your future, plus interest. As it goes, if youíve got the debt, then those savings have already been spent.
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