THE BLOG
12/02/2014 10:53 am ET Updated Feb 01, 2015

Should You Use Savings to Pay Off Debt?

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Most of us have savings and some debt.

From time to time you've probably wondered if you should just get rid of the debt by using some or all of your savings.

First, everyone's situation is a little different.

Each of us have different amounts of savings and debt. Each of us have different cash flow decisions to make. Rest ye weary saver, for I have a few things you may want to consider.

Here are four questions you might want to ask yourself in the process:

1. Do you have an emergency fund? I've ranted about this one over and over again. If you have 3-6 months of expenses socked away in a safe place, it makes it much harder to rack up debt for unexpected emergencies. If you don't have one, then do not pay off any debt. If you have a small one, I would say get at least 3 months of expenses first. If you have more than 6 months of savings, then get crackin' on that pesky debt.

2. What is the cost of your debt? If you are paying ridiculous rates of say over 8 or 9 percent, then by all means pay it off. If you have debt that is in the double-digit range it will be your first priority. For me, the break point is about 7%. If the investment will return that much or more, then keep your savings working for you.

3. Do you have more money coming? In other words, are you expecting any windfalls in the near future? This would include gifts from parents, sale of property, tax refund or inheritance. If you are, then plan on paying down expensive debt aggressively. This may be the only time you'll have this kind of money to get your financial house in good order.

4. What are your financial goals? If you have goals that will require large sums of money, then you may want to keep that money in savings or invested. If your goals is in the short-term, then you probably don't want to put yourself in a pickle by not having the money when you need it.

For me, it's not an either-or question. It's both. You really need to save and reduce debt. Easier said than done, right? It can be done, you just have to make some sacrifices today to get yourself in a better situation for a financially secure future.

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