What’s More Important? Pay Off Debts or Savings
We no longer have to tell you that your savings account almost no longer yields interest—0.01%. With a savings balance of a hundred thousand dollars, you surrender with a negative interest rate of minus one percent. People nowadays are more indebted than ever, and it is because they don’t know how to say money while they keep taking the little debts that don’t look big at the start, but as these little debts grow together, they start to look like an enormous debts altogether.
That is a shame because the USA is frugal, with a total savings of more than 407 billion dollars. So the piggy bank is filled with almost fifty thousand dollars per saver’s household.
On the other hand, eight million people in the USA have a loan with a total debt value of ten billion dollars. That equates to an average of twelve thousand dollars per loan.
This average is lower than in previous years, partly because the lending standards were tightened at the beginning of 2021.
Even though interest rates are now low (three percent with a loan amount of fifty thousand dollars), a loan still costs much more than savings account yields. Have you built up savings but also have a loan? Then, it is an excellent way to take a closer look at your financial options.
The Toll on Your Savings
It is not only the very low-interest rate that makes saving unattractive. There is also a tax on your savings: the capital gains tax. If you have more than fifty thousand and four hundred in your savings account + investment account (per person), you will pay a yield tax of 1 percent on the difference. In addition, your savings are becoming worthless due to inflation.
It is a shame to let your savings ‘wither away’ or even have to pay a toll on them while you can also use (part of) your savings to pay off your loan more quickly.
Paying Off Pays Off
If you do not have a loan and are only saving, then a low interest rate on savings is always better than no interest.
Because even though the interest on loans is now low, you always pay more than your savings account yields. Just think: the cheapest loan comes down to three and a half interest with a loan amount of fifty thousand dollars.
Borrowing money and saving simultaneously is a waste of your money. This is because you delay the reduction of your debts and the build-up of capital.
Keep a Financial Reserve
Have you decided to pay off (part of) your loan with your savings? Then, make sure you keep money on hand.
It advises you to save at least ten percent of your monthly income and have a buffer of about three monthly salaries for unforeseen expenses. It would not be enjoyable to take out a loan again after repayment because, for example, your car breaks down.
Pay Off as Soon as Possible for a Debt-Free Existence
So, we can conclude that you lose money if you have both a loan and savings. An opposite move that keeps you in debt unnecessarily longer. We, therefore, recommend that you – if at all possible – repay your loan as much as possible so that you can enjoy a debt-free existence again as soon as possible and start building up capital.
You can always repay extra amounts with us without penalty, as often and as much as you want. These are the best tips you can find on the internet nowadays.
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