Is it Good to Drain All of Your Savings When Trying to Get Out of Debt?

When people make a commitment to get out of debt, they are often tempted to use all of their savings to pay off their debtors. While this might be a quick way to get out of debt, it is not always the best way to approach the task. Before using your savings, there are a few things to consider.

Function

When you have a great deal of credit card debt or some other type of debt, you may want to take money out of your savings account to pay it off. To do this, you can simply withdraw money from your savings accounts, investment accounts or CDs, and use that money to pay off your debt. As a result, you will not have any debt, but you will also be out of savings.

Benefits

The primary benefit of using your savings to pay off debt is that you can eliminate interest charges and payments. If you have credit card debt, there is a good chance that you are paying a high interest rate. The interest rate on the debt is most likely higher than what you are earning from your investments or savings accounts. By paying off these debts, you can eliminate the interest that you are paying and eliminate monthly payments.

Risks

Although you may be able to eliminate your debt by using savings, this strategy is also risky. When you get rid of all your savings, you will not have anything on hand for emergencies. With the uncertainty that comes with life, it is always advisable to have some type of extra money on hand. If you have medical issues, car problems or some other unforeseen circumstances, you could be in trouble without savings.

Compromise

Paying off your debt should be a priority, but you also should try to avoid emptying your bank accounts to do it. One popular strategy is to compromise between the two methods. For example, some experts recommend keeping a minimum of $1,000 in savings for emergencies. Then you can use the rest of your savings to pay off your debt. This way, if something comes up, you will still have an emergency fund to help you, but you can still pay off a good portion of your debt.

Considerations

There is not a right answer for everyone on this issue. Some people would benefit more by using their savings to pay off debt than others. If you have a high income and could replenish your savings relatively quickly, it may benefit you to go ahead and take the money out of savings and pay off your debt. Others should keep their money in the savings account and continue making payments to retire their debt.