How to Determine if You Should Pay Off Debts Before Beginning a Savings Plan

Most people understand the importance of paying off their debts in a timely fashion. The quicker that their debt is retired the less they will spend on interest. Paying off a few high rate credit cards can save hundreds or even thousands of dollars over the course of a few short years. Also, each time a debt is paid off the individual has additional funds available to use elsewhere. Most people are also aware of the importance of instituting a savings plan. In the short term a reserve of money can act as a buffer in the case of a financial emergency. In the long term, a proper level of savings can provide for a comfortable retirement. Since paying off debts and instituting a savings plan are both important, many individuals are confused on where to begin first.

Click Here for a Free Debt Consolidation Quote! Reduce Your Credit Card Debt by up to 60%!

While examining this issue, the biggest factor to consider is the interest rates that are involved. How high are the rates you are currently paying versus the rate of interest that you could be earning? Although this is not always an easy question to answer there are some rules of thumb that apply. If you are carrying credit card balances (or personal loans) with high interest rates it would be in your best interest to pay these off as soon as possible. The chance of you earning more through an investment than you are paying to your creditors is pretty slim. On the other hand, it would be in your best interest to begin saving money well before your mortgage is paid off. This makes financial sense due to the low interest rates and tax advantages that are associated with home loans. This same line of reasoning also applies to student loans, and low rate car loans.

It makes sound financial sense to pay of high interest debt as soon as possible. Once this is accomplished it becomes important for an individual to institute a savings plan. This is true, even if the person possesses some low rate debts. The benefits that are gained from having an emergency fund, as well as, the interest that is accrued in a long term savings investment, outweigh the interest you will pay on the debt (such as a mortgage). If an individual waits until he is completely debt free to begin saving, he may never end up saving

~~~~~~~~~
About the author:

Mark Carney is a professional consultant with First American Debt Consolidation and Loans, a debt consolidation service specializing in financial education, credit counseling, and debt management services nationwide.