Most people wonder whether they should pay off their debts, squander what they have, or save for their retirement. Experts recommend that it is better to pay off your debt before you start saving for your retirement or increasing the amount of your emergency fund.
Generally, if you have a debt that attracts high-interest rate that is not tax deductible, then, it’s better to pay off this debt before you start saving. Note that you are not likely to earn much interest from your savings yet; you are expected to pay higher interest on your debts. If the debt interest is higher than the interest you are likely to earn on your savings, then, it makes sense to clear your debts first. Otherwise, you will be losing money.
However, personal finance decisions aren’t that simple. Though most people attempt to ditch a debt, it’s not the best option. For instance, it can mean that you will not have an emergency fund to finance any emergency issue that might arise. This will mean that you will need to take up more debt to meet the unexpected expense.
Here are other reasons you need to pay off your debts.
Enhance your credit score
If you intend to improve your credit such that you can qualify for an auto loan or a mortgage, then, clearing your debt can jump start your plan. Note that your loan balances and credit card factor into your FICO credit score. Note that savings history with your bank does not influence your credit score. However, if you are ready to prove your creditworthiness by having extra points to your credit score within a short time, consider paying off your debts early. Once your credit score is high, you will be eligible for low-interest mortgages and loans.
Pay debts to be at peace
If you owe thousands or hundreds of thousands of dollars in your debt, perhaps credit card debt, you already understand that it’s likely to cause anxiety. The thought that you owe someone huge amount of money can even make your stomach turn. Paying off your debts can relieve you this anxiety and have peace of mind.
You should never make a mistake of attempting to save for your retirement when you have a huge debt to clear. In the long run, it can be difficult to pay off the debt.
Patrick Ward is a legal researcher specializing in finance, loans and debt analysis, and bankruptcy law. He has a decade of experience in analyzing the legalities involved in the dynamics between local and global financial institutions. He is also passionate in helping individuals overcome their financial challenges. Follow on twitter @blgbankruptcy