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The priority to pay off debts should be the first on your finance list. However, people with debts often believe that they need to “save for a rainy day.” It’s the idea that it is always good to have cash on hand, just in case your car breaks down, or the HVAC system decides to break down.
It seems like a good idea – and it is if you don’t have any debts. But when you add mortgages, credit cards, and student debt to the mix, it doesn’t make a lot of sense. People with high levels of debt are always going to want to pay that down first before they begin saving up their money and building their wealth in a positive direction. But why?
Pay Off Debts Before Saving For A Rainy Day
It all comes down to the nature of debt itself. Forget about the idea that you “must save money” and instead pay off your debts first. That’s the pro advice.
Banks Love It When You Save And Go Into Debt
When it comes to the banks, it’s a case of “heads I win, tails you lose.” They can make money out of you, whether you save or have debt. In fact, they want you to do both.
As most of you know already, banks make money when you take out debt with them. The money they get is the interest that you pay on the loan – whatever that happens to be.
Banks, however, also make money when you save. They pay you a low rate of interest, and then take your deposit and lend it to other people at a higher rate. They then pocket the difference.
In fact, it is even more extreme than that. When banks lend money, the person who receives the credit doesn’t always use all the money that they have in their checking account immediately. So the bank can give a portion of it to the next person and so on. Savings, therefore, can be very lucrative for banks, which is why they encourage it.
Interest rates are now so low that the average person isn’t all that bothered about keeping their money in savings. Instead, they either keep it as cash, or they take out credit. Both of these methods of using money still help banks.
So pretty much whatever you do, you’re helping financial institutions make money. That’s why there’s no clear advice for whether you should save or clear debts. Doing both helps the powers that be.
When To Save And Not Pay Off Debts
Sometimes there are occasions when you want to save money and not pay off debts.
The first is when you have a student loan.
Student loans are different from conventional loans in that you often only have to pay off the debt in particular, low-interest installments.
What happens to your student loans if you file for bankruptcy? It all depends on the effort you’ve made to clear it. Under some bankruptcy options, you can reduce the amount of the debt, and under others, you can remove it. Still, it depends on whether you can prove to the court you’ve taken all reasonable actions to get rid of it.
You also want to avoid paying off debts if doing so would incur a fee. Companies will sometimes force you to pay extra if you want to get rid of a loan quickly. These fees can be so high that it isn’t actually worth paying off the debt, and you’re better saving your money instead.
Another exception is when you have very low interest or “interest-free” debt. Some companies offer “zero percent” finance when you buy furniture or a new washing machine. While this is debt, it doesn’t cost you anything. In fact, it costs the lender money, so it actually makes you better off, and you should take advantage of it whenever possible. You borrow and zero interest and then save your money in a way that generates interest, making you better off.
How To Save And Generate Income
If you do decide to save, do so in a way that minimizes your losses. Don’t plow all your money into a regular savings account and just leave it there. Banks aren’t paying high rates of interest.
Instead, look for ways to get a return on your money. Buy a property and rent it out. Buy a mixture of equities and wait for the price to rise. You know the drill.
What you want to do is what all the wealthiest people in the world do: find something that pays a handsome return and reinvest the money you make to buy more assets.