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How to Avoid Using Savings to Pay Off Debt

By Kayla McCormack · July 14, 2022 · 5 minute read

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How to Avoid Using Savings to Pay Off Debt

Paying down debt can be an important financial priority, but should you use your savings in order to do so? While it can be tempting to throw your full efforts into paying off debt, maintaining a healthy savings account for emergencies and saving for retirement are also important financial goals.

Continue reading for more information on why it may not always make sense to use savings to pay off debt and ideas and strategies to help you expedite your debt repayment without sacrificing your savings account.

The Case Against Using Savings to Pay Off Debt

Emptying your savings account to pay off debt could cause you to rely on credit cards to cover expenses, which has the potential to create a cycle of debt. Think of it this way — it can be much harder to get yourself out of debt if you keep using credit cards to cover unexpected costs.

Consider creating a plan to pay off high interest debt while maintaining or building your emergency fund. This way, you’ll be better prepared to deal with unexpected expenses — like a trip to the emergency room.

How to Start Paying Off Debt Without Dipping Into Your Savings

First off, if you do not have an established emergency fund, consider crafting a budget that will allow you to build one while you simultaneously focus on paying down debt. The exact size of your emergency fund will depend on your personal expenses and income. A general rule of thumb suggests saving between three and six months worth of living expenses in an emergency savings account. Having this available to you can help you avoid taking on additional debt if you encounter unforeseen expenses.

Make a Budget

Now’s the time to update or make a budget from scratch. Understanding your spending vs. income is essential to help you pay off your debt and avoid going into further debt. Review all of your expenses and sources of income and figure out how to allocate your income across debt payments, while still allowing you to save for your future.

Establish a Debt Payoff Strategy

Review each of your debts. Make note of the amount owed and interest rates. This is important to create a full picture for how much you owe. Then, pick a debt pay-off strategy that will work for you. Popular debt payoff strategies include:

•   The Snowball Method. For this method, list debts from smallest balance to largest — ignoring the interest rates. While making minimum payments on all debts, all extra payments should go toward the smallest debt. As the debts are paid off, move to the next largest debt until all debts are paid off.

•   The Avalanche Method. Similarly to the snowball method, this debt payoff strategy focuses on paying off debts with high-interest rates first. By focusing extra payments on the highest interest rate debts, this strategy helps minimize the amount of interest you pay, which might save you money in the long term.

•   The Fireball Method. This strategy combines both the Avalanche and Snowball methods. Individuals group their debts into good or bad categories. Good debt is considered debts that help build net worth and generally have an interest rate of 7% or less. While making the minimum payments on all accounts, the Fireball focuses on paying the highest interest loan with the smallest balance first.

Different people may prefer one strategy over another, the key is to select something that works best with your debts, income, and financial personality.

Recommended: Explaining the Snowball Method of Paying Down Debt

Consider Debt Consolidation

If you have debt with a variety of lenders, one option is to consider consolidating your debt with a personal loan. Instead of making multiple payments across lenders you’ll instead have just one payment for your personal loan. One common use for personal loans include consolidating credit card debt. Because credit card debt generally has a high interest rate, consolidating it into a lower-interest personal loan can potentially lower the amount of money owed in interest during debt-payoff.

There are a couple different types of personal loans. For example personal loans can be secured or unsecured and may have either a fixed or variable interest rate. To find the best personal loan for you, review the options available at a few different lenders.

Review the application requirements with your chosen lender. Having the required documentation ready can streamline the application process and hopefully, get your personal loan approved. During the application process lenders evaluate factors including your income and credit history, among other considerations, to make their lending decisions.

How to Reduce Spending to Pay Off Debt Quicker

Reducing your spending can make more room in your budget for debt payments. Making overpayments can help speed up debt payoff, but it can be challenging to amend your spending habits. To lower your spending, take an honest look at your current expenses and spending habits. Review your budget and credit card statements to see where your money is going.

Think seriously about your needs vs. your wants. Start making spending cuts in the wants category, for example reducing the amount of takeout you order, limiting streaming services, or other indulgences.

For less luxurious expenses like internet or your cell phone bill, call your service provider and see if they are willing to negotiate with you or evaluate if you are able to switch to a less expensive plan.

If you’ve already got a tight budget, the alternative is to increase your revenue stream. Consider a side hustle to boost your income and funnel that additional money toward debt payments. You may even be able to find a side gig that allows you to make money from home.

Paying Off Debt the Smart Way

It can be tempting to throw your savings at debt to avoid racking up expensive interest charges. But draining your savings account — or failing to save at all — in favor of debt payoff might not be a smart strategy. With little or no savings, you’ll be less prepared for any emergency expenses in the future, which could lead to even more debt. Consider building your savings while paying off debt by creating a budget, cutting your expenses or boosting your income, and finding (and sticking to) a debt repayment strategy.

One option worth considering is using a personal loan to consolidate your debt. Using a personal loan to pay off debt may sound counter-intuitive at first, by securing a personal loan with a more competitive interest rate than your existing debts, you could lower the amount you spend in interest. To see how using a personal loan to consolidate your debt might benefit you, take a look at SoFi’s personal loan calculator.

If you are looking at borrowing a personal loan, consider SoFi. Qualifying borrowers can secure competitive interest rates and some loans may qualify for same-day funding.

Looking to tackle your debt with a personal loan from SoFi? There are no origination fees or prepayment penalties. See your rates in one minute.


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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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