Saving Money and Debt
Saving money or paying down debt? Which is more beneficial to your financial freedom? I have in the past been a little, well maybe a lot, persistent about encouraging my readers to save, save, save.
But, I'm the first to admit when I may have been misguided in reference to those who are trying to become debt free and become financially independent.
I must apologize if I led anyone down the wrong path when it comes to the "saving money" or paying down debt controversy.
Considering the evidence before me, and all the research I have done, I have to admit that investing in your debt, not saving money, is a much wiser choice.
I guess my Daddy was right all along. With even a slight mention of credit my dad would start his speech. He never believed in buying anything on credit. He just couldn't see any sense in giving away money to a bank. Especially since they offered so little in return when using your money!
He just couldn't see a fair exchange there and we all know he's right! Your interest paid will always far exceed your interest earned.
Jeffrey Strain's article below is a very logical, convincing, accounting of why paying down debt is more beneficial. Saving money can actually be costing your money if you are carrying debt.
I think you'll find it as interesting as I did!
Stop Saving Your Money!
The title of this article probably caught you a little by surprise. The first thing to make clear is that the article's title is not a typo. That being said, you are probably wondering why an author dedicated to helping people with their personal finances is doing writing an article that plainly states not to save money. The answer is quite simple: there is a much better way to be utilizing your money than putting it into your savings account.
Before we get into the heart of this article, let's take a minute to look at money from a different perspective. Most people assume that if they have an account with money in it, then they have "savings." On the surface this may seem logical, but if you take a deeper look into the reality of most people's financial situation, it simply isn't true. What they have is not savings, but an easily accessed pool of money in case of an emergency. Most people see the two as the same thing. This article will show you that they are not. Savings is a pool of money that you have above and beyond all current debts that you owe. While most people have a pool of money that is easily accessible in the event of an emergency, this money is rarely money above and beyond their current debts (if it is in your case, you can disregard the article title and save to your heart's content).
While this concept may seem like trivial semantics, understanding the difference will go a long way in helping you truly save money for your future. Let's look at an example that will help to illustrate the point.
I assume that most of you have a savings account of some type. If you are lucky with the current economic conditions, it is earning a few percentage points in interest each year. Let say, purely for example's sake, that you have $5000 earning 2%. On the surface you would assume that your money is gaining 2% a year.
Unfortunately, you also have to take the inflation rate (the increase in cost of the same items year to year) into consideration. In this example, the current inflation rate wipes out the interest you are earning meaning that you are breaking even each year.
While breaking even is better than losing money (the situation if you kept your money someplace that isn't earning any interest), we still need to take into account some other issues that most likely apply to you.
Chances are you have some credit card debt. Let's say, again purely as an example, that you're paying 18% interest on a $5000 outstanding balance on your credit card. While the money in your savings account is earning 2% (which is actually 0% when inflation is factored in), you are at the same time paying out 18% to the credit card company for the same amount. Taking this into account means that your $5000 in "savings" is actually losing 16% a year (or 18% with inflation factored in).
While this is definitely not a rosy picture when you thought your were saving money all this time, it gets even worse. You are required to pay taxes on the 2% interest you earn in your savings account while you are paying the credit card interest rate with after tax dollars.
When you look at your savings from this reality, the first thing that should be obvious is that it makes no sense to "save" and thus the title of this article. Don't save money! Instead, take any extra money you have and start paying down your outstanding credit card (or if you don't have credit card debt, any other) debts with it.
By taking this approach, you will be getting an 18% guaranteed return (or whatever your current credit card interest rate is) on your money instead of losing 16+%. Better yet, you will save yourself hundreds, if not thousands, of dollars in interest charges and you will move toward the point when you really can save money for your future.
-Copyright (c) Jeffrey Strain. Reprinted with permission. He is the owner of SavingAdvice.com - a personal financial site with tips and articles dedicated to saving you money.
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