How to Decide How Much of Your Savings Should Pay Off Debt
When it comes to deciding whether to save money or pay off debt, the specifics of your situation can make the answer very subjective. Simplify this by multiplying your interest rate on debt by ten and applying that percentage of your savings to pay off your debt.
As the personal finance blog Financial Samurai explains, high-interest debt will eat up your savings over time, no matter how well invested. If you have $ 3,000 in a retirement account that yields 8% of annual income, but you also have $ 3,000 credit card debt that you owe 18% YoY, you will lose in the long run if you don’t. t pay the price for it. Of course, you can’t just avoid saving just because you have a car payment or a mortgage, can you? To figure out when to pay off debt and when to save, multiply your interest rate by ten:
The one dollar interest you should consider to pay off the debt is simply the interest rate on debt X 10. In other words, if your student loan or mortgage interest rate is 3%, then set aside 30% of your savings to pay off. reduce your debt and use 70% of your savings to invest.
Most auto loans or mortgages (at least in the US) are less than 10%, which means you probably won’t spend 100% of your savings on debt. However, credit card debt is often in your teens or older, which suggests that paying off it is more important than saving, even if you spend 100% of your savings paying it off. Of course, keeping a reserve fund is a smart idea. Anything beyond that should probably go towards paying off that balance, though, or your investment won’t mean you end up earning the same amount.
Pay off debt or invest? Implement FS-DAIR | Financial Samurai via Rockstar Finance