Maybe you just ran into a bit of money and you are wondering what to do with it. Should you pay off an existing debt at 25% interest? Should you put it in a savings account for 1% interest? Should you buy something you want? It can be a real tough decision.
Let’s look at these options in more detail below so we can figure out the best place to put that money.
Pay Off Debt
If you focus on paying down your debt first, you are decreasing how much you pay in interest and potential penalties like late fees. The problem is that when something inevitable happens – your car breaks down, you get sick, that sort of thing – you’ll likely fall back on your credit card instead of your savings account and add more debt.
Check out our debt calculator to find out how much interest you’ll pay on your credit card balances.
The good side of this is that you have money in your savings. The bad side is that you have more debt and have been potentially paying a lot of interest charges. And you may even approach retirement with debt, which can mean more working and budgeting with less relaxing.
Find out more about having debt when you retire. Read our article Thinking about retirement? Get a handle on your debt first!
When to Pay off Debt First
If you have a lot of high interest credit cards, focus on paying them down. Look for lower interest credit cards with balance transfer options. Hint: read the fine print to make sure it is a good deal. You can consolidate your credit card bills by getting a lower interest loan.
When to Put Savings Goals First
If you do not have high interest loans, you can focus on saving up $1000 first and then start saving three to six months worth of expenses. You can use this money to cover those unexpected events like car repair bills, instead of running up more credit card debt. Once you have this savings built up, you can then pay off your debt and start saving for retirement.
Using a 401K to Pay off Debt
If you are fortunate enough to have a 401K, should you cash out your 401K to pay off debt? The short answer, possibly. Since you will pay income tax on the withdrawal and incur additional tax penalties, it probably only makes sense to pull out 401K funds if your debt interest rate is greater than 18 or 20%. You should talk to a financial advisor before you take this step.
Using Savings to Pay Off Debt
If you have savings, should you use it to pay down debt? Yes, but do not drain your savings. Instead, try to keep at least 6 months of expenses in your savings account. Use the rest to strategically pay off your debt. Either pay off the highest interest debt first or pay off smaller debts. We discuss some techniques to start saving money in “How to get out of debt in 2020.”
How to Save Money While Paying Off Debt
The blended technique — saving money and paying off debt — offers the best of both worlds. Set a reasonable savings goal — usually $1000, cut expenses, and live on a very strict budget. Then put half of any extra money into savings while you use the other half to pay down debt. The biggest secret is to not run up more debt while you are paying down your existing debt.
What if I Can’t Pay Down My Debt?
If you are unable to make even the minimum payments and putting aside savings is a distant dream, there is still help available for debt relief. You may benefit from credit counseling, debt consolidation, or debt settlement. Each option has drawbacks and each has benefits. Pacific Debt Inc consultants will explain your options to you and help you find the best solution for your unique situation. Your initial consultation is free.
Pacific Debt, Inc
Pacific Debt Inc is one of the leading debt settlement companies in the US. We help you understand your options and whether or not debt settlement is your best option. If it is not, we will refer you to a trusted partner who may be more appropriate for your financial situation.
If you’d like more information on debt settlement or have more than $10,000 in credit card debt that you can’t repay, contact Pacific Debt, Inc. We may be able to help you become debt free in 2 to 4 years and we’ve settled over $300 million in debt for our customers since 2002.
Once you’ve completed our debt settlement program, your financial situation should start to improve. You’ll then be able to take the money you once had to pay towards your debt, and be able to use it for other purposes like saving, investing, retirement, etc.
Pacific Debt, Inc is accredited with the American Fair Credit Council and is an A+ member of the Better Business Bureau. We rate very highly in Top Consumer Reviews, Top Ten Reviews, Consumers Advocate, Consumer Affairs, Trust Pilot, and US News and World Report.
Pacific Debt is currently providing debt relief coverage in the following states:
Alabama, Alaska, Arizona, Arkansas, California, Colorado, District of Columbia, Florida, Idaho, Indiana, Kentucky, Louisiana, Massachusetts, Maryland, Michigan, Minnesota, Missouri, Mississippi, Montana, North Carolina, Nebraska, New Mexico, New York, Oklahoma, Pennsylvania, South Dakota, Texas, Utah, Virginia, Wisconsin
* Other states can be connected to one of our trusted partners
For more information, contact one of our debt specialists today. The initial consultation is free, and our debt experts will explain to you all your options.