How Paying Down Debt When Rates Are Low Can Save Money
It seems like every time I check my bank's interest rate, it's getting lower. But while today's record low rates are bad for growing my savings, they can be good for paying down debt - a saving method in itself.
Eventually - and probably sooner rather than later - rates are going to start going up again. Who wants to lock up money in a 5-year CD at 1.5% when rates could be double that in just a couple years, right? Fortunately, as Chicago bankruptcy attorneys point out, compounding can work in reverse, too.
Let's say you invest $2,000 in a 2-year certificate of deposit at 2% interest. Every time interest is applied, your balance gets a little bigger, more interest is applied to that larger balance, and so on. With a high interest rate and enough time, the rewards can be, well, rewarding - but in this case, they amount to a final fund of $2,081 - just $81 more than what you started with.
Now let's say you take that $2,000 and apply it towards a $10,000 credit card debt for two years- in other words, you pay about $83 (or $2,000 divided by 24) over the minimum each month. At an interest rate of 18%, you'd shave off 13 months of payments (33 instead of 49 months), a savings of $1,181 - not to mention you'd be finally getting rid of the burden of debt.
Not sure if you'd be better off investing or paying down debt? Check out the comparison calculator at Yahoo Finance or this nifty debt reduction tool. And remember, this isn't to say that you should put saving on the backburner altogether. If you don't already have an emergency fund, your first move should be to sock away enough for you to live on if you lose your income or are faced with some major surprise expenses.
Of course, finding the money to save or pay more than the minimum on a large, high-interest debt is often easier said than done. If you can rework your budget to cut out a few expenses, you've got it made - but if not, bankruptcy is a time-tested way to get started. Not sure if filing for bankruptcy is right for you? Let our Chicago bankruptcy attorneys take a peek at your finances and answer your questions with a free personal debt analysis.