Pay Off Debt Before Saving

Though economists may wish differently, humans are far from rational. This is the biggest reason so many people contribute to savings accounts while still having debt.   The most important thing to understand is that few savings accounts offer comparable interest to credit cards. If you have $10,000 in a savings account earning 5% per year and $5,000 on a credit card at an interest rate of 20% per year, your net worth after five years is zero.

While your savings will grow by $2,500, your debt will increase by $7,500 due to the difference in interest rates. This leads to the fact that it's always better to pay off debt if its interest rate is higher. Though you may want to keep the savings so that you can keep your pride, realize that will cost you real money.

Saving Feels Better

There's no denying that it feels better to save. Saving feels like building a foundation for your future, a far cry from simply paying off debt. You may envision your savings for the kids' education, improving your house, or whatever else – and it's in an account earning a reasonable interest rate. However, this strategy will only cost you if you've got high-interest debt.

Be Financially Healthy

As stated earlier, having money to pay off debt and keeping a savings account earning comparable interest is contrary to your best financial interest. Debt is for people who don't have the money and need to borrow it. If, for example, you keep your savings in the same bank where you have a credit card, then you are, in effect, paying for the privilege of borrowing your own money from them. This can only hurt you. Remember, your financial health is in your hands, and making the right choices can put you in control of your future.

There are more positive reasons for paying debt, which aren't only related to the difference in interest. First, you'll be less stressed about your debts. Imagine the emotional relief of being debt-free, the weight off your shoulders. Second, your credit report will be better because you can repay everything. This has the added effect of getting you a much better interest rate if you ever need to go into debt again.

While all of this can be difficult to stomach, paying off debt first is wiser. Though you may get the feeling that you're spending away your savings and thus your future, understand that the debt you have means you already did that. So, do the next smart move and reduce your debt, even if it takes away most or all of your savings. Remember, this is an investment in your future financial health and stability.

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