Is it better to have money in the bank or pay off debts?


If you have some savings in the bank, is it better to keep it there earning some interest or pay off debts like credit cards or loans?

If you are in a situation where you have some money in a savings account, but also have credit card debts, it can sometimes seem like a difficult decision – keep the money for a rainy day – or pay off debts.

It seems like a good idea to keep some cash handy, after all you never know when you might need to dip into it.

But looking at the plain financial benefits over a longer term, if you pay off debts it is probably a wiser decision.

Any savings account, even if you keep up to date with your ISAs and renew them each year to take advantage of the better interest rate, is probably only paying you about 3% interest, at best.

If you have debt on a credit card, the interest rate is maybe 15%, 20% or more.

Image of Managing Your Money book to pay off debts

Manage Your Money

Any money you gain from interest on your savings is more than wiped away, multiple times over, by the growing interest on your credit card debt.  So it’s not as if the interest you earn on your savings is covering your debt payments. Overall, you are actually becoming more and more in debt all the time.

So, use the money you have got saved and pay off debts now.

OK, that means your savings are gone, but hopefully the debt is gone now too.

And that means you are not needlessly throwing money away to credit card interest every month.  And with the debt gone, you can start to build your savings again, without the extra pressure of knowing there is debt building up.

 

 




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