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To Save or Not to Save?

To Save or Not to Save?

That is the question!

And a good question it is. In the days of out of control debts and spending for most Americans, the rallying cry has come from the very top that “Americans need to save more!” True, but depending on your situation, saving might not be the wisest use of your money. But wait!  Before you run out on a shopping spree, you might want to consider that if you have debts, spending more is the wisest use of your money.  So if you have outstanding balances then you definitely shouldn’t spend, but what should you do with your funds?

That all depends on whether or not you have outstanding balances. The simple math of the matter is that if you have a personal loan with a $4,000 balance at 15% interest, you are losing money by having $4,000 in the bank account paying you 2% interest. You’re better off putting that $4,000 toward the personal loan. Even a CD will not pay you back that 15% you are giving to the loan. Your 401(k) or other investment is not likely to give you that kind of return either. The best thing for many Americans to do with their money if they have debts is to pay off their high-interest debts by putting it into a low-interest savings account. Americans lose a staggering amount of money each year by saving that would be better spent paying off high-interest loans.

One caveat to putting debt before savings is to be wise in preparing for Murphy’s Law: anything that can go wrong…will. One would be wise to have a small ‘emergency fund’ of around $1,000 in the bank at all times just for those unexpected things life tends to throw at us. That way you don’t have to put that unexpected roof repair on a credit card, or the flat tire repair on credit, or the plumber bill from when your kid flushed a whole roll of toilet paper, on credit.

Once your debts are paid down to a small percentage of your total income (maybe 4 or 5 percent), it is okay to start putting some money in savings – as savings, not an emergency fund – even at a technical loss while you continue to pay down the remaining debts, hopefully to the goal of living completely on cash and not losing another dime of interest.

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