Are you Better Off Paying Down Debt or Investing Your Savings?
It's a sad day when even interest rates on online savings accounts - once the cream of the crop - are hovering below 2%. But just because today's rates aren't good for growing your nest egg doesn't mean they can't help you save money.
Interest increases our savings by the power of compounding. Whenever interest is applied, the total balance increases, to which more interest is applied - you get the picture. A lower rate means less interest. So when you invest, say, $2,000 in your bank's 2-year certificate of deposit at that 2% interest rate, you'll end up with $2,081 by the time your CD matures - that's only $40 in returns per year.
Now let's say that, instead of investing at a low interest rate, you pay down debt at a high interest rate - like an 18%APR credit card. If you put $2,000 towards your $10,000 credit card debt over a two year period - what works out to $83 more than your minimum payment every bill cycle - you could eliminate more than a year of payments and save nearly $2,000 in the long run.
Obviously, your results will vary by your unique financial situation - you can get an idea of your potential savings by plugging in your balance and interest into a debt reduction versus investing calculator. Likewise, the benefits of paying down debt depend on your savings history. Taking care of yourself should take priority over investing or debt reduction - that means making sure you have enough money saved up in a liquid account to cover unpleasant financial surprises like job loss, car repairs or medical bills.
Of course, none of this matters much if you're unable to pay the bills, let alone allocate money towards debt or savings. Fortunately, there might be a solution. Filing for bankruptcy can often make debt payments affordable. If you're still not sure about bankruptcy, why not talk to a professional? Our Atlanta bankruptcy attorneys can examine your finances and answer your questions for free when you sign up for a complimentary personal debt analysis.