Using Saving to Eliminate Debt

S

srothman

Expert Member
Joined
Mar 30, 2010
Messages
2,756
Reaction score
10
Location
Pretoria
Using Savings to Eliminate Debt

What are your thoughts on using savings to eliminate debt?

This will mean a 6k-odd "saving" per month on my expenses, not to mention interest, but it will mean quite a dent in my savings, although I *should* be able to recoup relatively quickly. I still have about 30 months left on this specific debt.

The alternative is to use other means of credit to cancel this specific debt, and halving the monthly payment, along with a slightly lower interest rate, but I don't really see the point of using making debt to pay off debt.

Thoughts?
 
Last edited:
I had the same conundrum as you. I chose to eliminate the debt. Let me tell you why:

1. It's easier to save knowing you are debt free (assuming this is your only debt). The mental aspect of saving while you're in debt is like trying to push a rock up a mountain. Yes you're going to get there, but you're fighting gravity (debt) while you do.

2. The money I had in savings wasn't growing as fast as the interest rate on my debt. So in this case, I took the money and paid of the debt. One could argue that it would eventually catch up, but again see point #1.

Now, being debt free, my savings goal is firmly in my crosshairs and I can actually enjoy saving/investing.

If you can save while paying off debt, more power to you. I say this because depending on how long you're in for, the growth on that money could far surpass the interest you will eventually pay on debt at the moment.
 
Good advice from semblance and cerebus. Saving the same amount you paid on your debt will have you back on track very quickly.
 
You should not have savings if you have debt. Cash flow > cash. Get rid of it now!
 
In theory the above works.

Assuming you have other savings in case an emergency happens.

No point having no debt then you can't afford to replace your geyser because you used all your savings.

The safer way to do it would be to leave your lump savings as they are, but use the monthly contributions that would have gone to your savings to rather pay your debt of faster.
 
Id say do it. Idid what you are talking about. Used a big chunk of my savings to pay off remaining debt. Just keep in mind what Chevron said to atleast keep some emergency money.
 
srothman said:
What are your thoughts on using savings to eliminate debt?

This will mean a 6k-odd "saving" per month on my expenses, not to mention interest, but it will mean quite a dent in my savings, although I *should* be able to recoup relatively quickly. I still have about 30 months left on this specific debt.

The alternative is to use other means of credit to cancel this specific debt, and halving the monthly payment, along with a slightly lower interest rate, but I don't really see the point of using making debt to pay off debt.

Thoughts?
Click to expand...

While this is an excellent idea you have to make a plan not to regress back into debt. Even with all your debt gone by means of your savings and you get yourself back into the position you are in now, its just going to repeat.

Another option you can look at is to consolidate your debts into one and then pay a chuck by using your savings with a sound financial plan to keep on paying them and not get into too much debt or none at all.

Chevron said:
The safer way to do it would be to leave your lump savings as they are, but use the monthly contributions that would have gone to your savings to rather pay your debt of faster.
Click to expand...

Exactly. There is no point when you are left with nothing or below nothing each month to continue to save and contribute 100%. This is where the sound plan comes in otherwise you will find yourself back into the position where you are in now and to this I can attest.
 
Last edited:
patrick said:
You should not have savings if you have debt. Cash flow > cash. Get rid of it now!
Click to expand...
I'll play devil's advocate. What if you have savings in a high risk/high return investment? You take that money and pay of debt but in so doing you lose your 25th year of compound growth on a 25 year investment. Some type of loss you suffer by starting your RA one year "too late".
 
Hamster said:
I'll play devil's advocate. What if you have savings in a high risk/high return investment? You take that money and pay of debt but in so doing you lose your 25th year of compound growth on a 25 year investment. Some type of loss you suffer by starting your RA one year "too late".
Click to expand...
I was going to post a similar strategy... short term pain for long term gain?

It would depend on the type of "savings" you have.

Is it cash? If so, use as much of it as possible to pay off your debt immediately.

If it is in investment "vehicles", try to sacrifice elsewhere to make cash available to reduce your debt, e.g. cut out the takeaways, bought lunches, piss ups with the mates, going to movies, etc. As a last resort chat to your broker and put your investments on hold for a month or three - WITHOUT cancelling anything! You can resume payments when your debt has been cleared.
 
MickeyD said:
I was going to post a similar strategy... short term pain for long term gain?

It would depend on the type of "savings" you have.

Is it cash? If so, use as much of it as possible to pay off your debt immediately.

If it is in investment "vehicles", try to sacrifice elsewhere to make cash available to reduce your debt, e.g. cut out the takeaways, bought lunches, piss ups with the mates, going to movies, etc. As a last resort chat to your broker and put your investments on hold for a month or three - WITHOUT cancelling anything! You can resume payments when your debt has been cleared.
Click to expand...

This is crazy talk! The rest however is very sound advice.
 
Thanks for all the comments. Yes, the savings are in the form of cash, and I have existing investments as well, none of which I want to/will cancel or suspend. I think I'll go the route of diverting my "savings" contribution towards the debt. Seems slightly financially irresponsible to not have some "rainy day" money.
 
srothman said:
Thanks for all the comments. Yes, the savings are in the form of cash, and I have existing investments as well, none of which I want to/will cancel or suspend. I think I'll go the route of diverting my "savings" contribution towards the debt. Seems slightly financially irresponsible to not have some "rainy day" money.
Click to expand...

This ^

We saved up until we had a nice "safety net". Then started putting that monthly amount into our bond ( our only debt). If safety net takes a knock, we top it up again for couple of months, then back to the bond. I rather have a cash "safety net" than use my CC for emergencies.
 
You must log in or register to reply here.
Back
Top
Sign up to the MyBroadband newsletter
X