Should I pay down my debt first, or save?

Question

I have $4000 in debt, and received about $4000 in a mutual fund as a gift. Since my creditors are charging me a higher % than i'm earning in interest, shouldn't i pay off my debt?

Answer 1

First is there a penalty for taking the money out of the mutual fund? Other than that, of couse if you pay off your higher interest debt you'll certainly be ahead... but will you leave yourself so short of cash? will you begin to use your credit cards again? This something to consider. Be sure that you have enough of an allowance to get from paycheck to paycheck without using your credit cards. If you buy online you can start a free paypal account and make payments that was straight from your bank account to keep tempation low.

The key is you don't want debt - especially in today's economy. Americans in general are now saving at close to 0% and many of us are two paychecks away from losing everything so I would suggest you pay down $3000 of your debt with the mutual fund. And continue to pay down the last $1000 at the highest level you can without leaving yourself so short that you need to use your card to make up the difference each month. And KEEP the $1000 in your savings in case you have a catastrophe and grow it if you can.

Good Luck.

Answer 2

In general, yes, pay off the debt. BUT depending on your circumstances, you may choose a different way to do it.

First, do you have enough cash flow (e.g. from salary) to live on? And do you have any expenses coming up that your cash flow?

If so, I would pay off $3,000 right away and keep $500 in the mutual fund. Then, I suggest you put away 10% of your earnings into the mutual fund - ideally by having an automatic deposit into the mutual fund. Then *forget* about the mutual fund and let it grow for some long-term use. Use the rest of your income to pay down the remaining $1000 debt on a regular basis, for example, like $100/month.

At the same time, open an IRA with the remaining $500, preferably a Roth IRA (withdrawals from a Roth are not taxed when you retire). Set up an automatic deposit there too. Vanguard is a good place to do this. Pick an IRA for your estimated retirement age - they will adjust the risk level for you.

I won't explain why this is a good idea. Read about it on the link below. But I PROMISE you that you'll be really glad you did it.

Answer 3

Of course you should pay off the debt first!

A good rule of thumb whenever you are managing your money is that you should pay off your higher-interest debts first, and then work your way down. the higher the interest, the more you are getting charged per dollar each month, meaning that a small debt at a high interest rate should actually be paid off first, as compared to a larger debt with a smaller interest rate.

Saving while you are in debt is out of the question. Unless your income from your savings' interest is more than you would lose by holding onto your debt, you shouldn't even consider saving the money.

Pay off the debt, and sleep easier at night.

Answer 4

I would put about 1/2 to 3/4 on the debt and the rest in a mutual fund that is tax deductible at the end of the year.

Answer 5

Debt is usually best to get out of the way first, but that is a pretty large sum of money you've got there, so you might want to pay of 3/4 of the debt and put 1,000 into high yield savings... I'm not sure exactly what they're called but something you can't get at right away that'll earn interest in the bank for quite a bit. Even when you're in debt, it's important to save because you never know when you're going to get money again, so I'd say pay most of it off but stash some away for safekeeping.

Answer 6

That depends on what kind of debt you have. If your debt falls under the good debt category (student loans, etc), then you should keep the mututal fund as is and work to pay down your debt over time. Remember, the interest you pay on these good debts are tax deductible. However, if your debt falls under the bad debt category (credit cards, etc), then it is wiser to pay off your debt now with your mutual fund. Here is why: mutual funds, like all non-FDIC insured funds, are not guaranteed to grow with time. Unlike your savings account (which is FDIC-insured), you may lose money in your mutual fund over time. Since you are guaranteed to owe more money over time with your credit card debt but not guaranteed to earn more money over time with your mutual fund, it is better to pay off your debt ($4000) now with the money from the mutual fund ($4000). This way, you start off on zero instead of possibly being in the negative.

Here is another reason you will want to pay off your bad debt as soon as possible: it will affect your credit - which means it will affect the amount of money you can borrow in the future to buy a car, house, etc.

Answer 7

Absolutely. If that debt is not paid, it will eventually grow to much more with interest. Pay it now while you have the funds to do it with, then start saving and try not to slip into debt again. I recently got myself out of debt and it is wonderful. Not only is it a nice feeling, but your credit rating goes up and you no longer have monthly payments. When your credit score goes up, you have a better chance of owning a nice home, being approved for that car you want to buy and so many other things.

Answer 8

If you are able to repay the debt in instalments, you should search other avenues of investments, where you can find more monthly returns than what your lending bank charges you monthly.

The possible source of getting more returns is only through real estate, but $4000 is a small amount to invest in real estate in USA.

It is better to repay your debt first and become debt free than investing in Mutual funds, and Start keeping some amont ( same as that you aught to pay towards the debt,) aside every month and invest to buy small number of equity shares of promising good companies of USA and some other ADRs other countries, listed at NYSE.

Answer 9

Yes, for the reasons that you have given. It's a false economy to have savings when you have debt as you will pay far more on the debt than you make on the savings.

Pay it off, then take a long hard look at your finances to make sure you stay out of debt in the future. Then save!

Answer 10

Yes, pay off your debt, then you will be able to save for what ever else you need. Pay off as much as you can for your bills, which means less eating out, buying clothes and entertainment. Buy food, but buy the cheap kind, even if you don't like it. Have to make a sacrifice to stay on top of things. We have done this and our debt has decreased to half! in Four years! (we had more than you :) ) Just remember, after you have paid off your debt, put a lot of it in the savings, for emergency or vacation time and always get the cheap stuff, and hardly go out. (This has saved us tons of money!) Good luck!