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Paying off debt with savings


 - Paying off debt with savings
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Should I pay off my debts with my savings?

“Those with both debts and savings are seriously overspending,” says Keefe. “The solution is simple; pay the debts off before you save. And forget the old-style ‘must have an emergency savings fund' logic—getting rid of debts beats that too.”

The difference between the rate at which the bank borrows your money (the savings rate) and the rate it charges other people for loans (the borrowing rate) is the bank’s profit, so as a general rule it will always cost more to borrow than you can make in savings.

There are a couple of exceptions though, Keefe says. “If you're locked into the debt, so that paying it off incurs a penalty, as with some loans or mortgages, then leave the cash sitting in a savings account until the penalty's small enough that it doesn't matter. The one other big exception is student loans, where the interest rate on your debt is normally less than the amount your savings earn after tax.”


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