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Savings vs Debt Reduction

February 10th, 2007 at 05:47 am

Here are a few questions you probably have never asked yourself because the answers seem so obvious. First: Why do you have a savings account? As the account name would imply, most people have saving accounts to save money. Second: If you have a savings account, does that mean you have saved money? The obvious answer would be "Yes" but let us take a closer look. If you have credit card debt and are paying double digit interest on it, and a savings account that is earning only single digit interest, you are actually paying out more money each month than you are saving.
If you are earning 3% on your savings and paying 18% on your credit card debt, you would assume that you were losing 15%. Not good at all, but in reality, it is even WORSE than it looks on paper. You have to pay taxes on all the interest you earn in your savings account while you are paying the credit card interest rate with after tax dollars. Looking it at this way, you can see why even when you try to save, it's nearly impossible to get ahead if you have unpaid credit card debt outstanding.

Now that we have brought this out, it should be pretty clear what the best course of action for the savings would be. No matter where you look, getting a guarenteed double digit return on your money is pretty difficult, but that's exactly what you'll get by taking your savings and paying down your current credit card debt. No one wants to use their savings in such a way since it has usually been saved with the intentions of having it around for an emergency. What is essential to realize is that credit card debt is an emergency that will make it impossible for you to ever save for anything until it is taken care of.

If this eliminates all of your credit card debt, count yourself lucky and you can move onto other debts that need to be paid off. If you are like most people, however, you still probably have outstanding balances on your credit cards. Have no fear...we'll get them taken care of in the next step.

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