Here are 10 reasons you might want to pay off some of your loans with your savings account:
1. Your interest rate is more than 4% or 5%.
2. You don’t have kids or people who depend on your income for survival – If you do, see number 3.
3. If you have kids/dependents and your savings account has more than 4-6 months of expenses. Do you have 10-12 months of expenses set aside? You’re probably overdoing it.
4. Your car/health insurance deductible is less than $1,000. If so, the small emergency fund you set aside will cover this and you are more likely to be okay were something to happen.
5. Your loan company is ridiculous. These days, loan companies are out to get you, not help you. If it’s a nightmare to get in touch with anyone, ask a simple question, etc. you should probably see if there is a way to rid yourself of them.
6. You have credit card debt. If you have an interest rate that is similar to a credit card (14%-29%), I would pay that off immediately if you have the savings to do it. Of course, give yourself enough of a buffer to get by should an emergency strike. But in my opinion, 20% interest IS AN EMERGENCY. Your bank account is ON FIRE and needs to be put out.
7. This debt keeps you up at night, stressed out and/or causes fights between you and your significant other. Emotional and physical happiness is worth more than having a low interest rate.
8. You understand that by using your savings account, you are promising not to take on any other debt after this one is paid off. If you know you will just get into more debt, it might not be wise to go this route.
9. You are okay with some risk and are willing to go big or go home when it comes to getting out of debt.
10. This “savings” account you are talking about isn’t your 401k, 403b, IRA, etc. Keep those funds in tact and use your other money to pay off debt. After fees and lost compounding interest, it’s not worth it.
Please remember that I would make sure to have AT LEAST $1,500 in the bank just in case something were to go wrong tomorrow. But if you have an exorbitant amount of MOOLAH sitting in savings earning 0.0001% interest, it might be worthwhile to put it towards a debt you’re paying 6% interest to keep. 🙂
If you’d like some specific advice, I’m all ears! Send me a note here.