Should you empty your savings accounts to get out of debt?
You may not benefit from emptying your savings accounts to free yourself from debt.
- If you owe money, chances are you want to pay it back quickly.
- When you have money in savings, it can be tempting to devote it to paying off your debts.
- It could be a decision you will regret.
Being in debt can be expensive, especially if you have high interest loans such as credit cards or payday loans.
If you’re working to pay down your balances and have money in savings, it may be tempting to empty your savings accounts in order to free yourself from debt. After all, even high-yield savings accounts have much lower interest rates than you’ll pay on the majority of loans. It may seem silly to leave your money in savings when you could be using it to reduce your balances and save on finance charges.
The reality, however, is that while there are pros and cons to depleting your savings to pay off your debts, you might be better off avoiding the decision. Here’s what you need to know to help you decide.
Benefits of paying off debt with your savings
Here are the main benefits of paying down debt by depleting your savings:
- You can save on interest. The sooner you pay off your balance, the lower the interest you can send to creditors.
- You can eliminate a monthly payment. If you repay your debt, you can redirect the money you were sending to your creditors. This provides more flexibility in your budget, making it easier for you to live within your means and save more later.
- You’ll have peace of mind knowing you don’t owe anything. Debt causes psychological stress for many people, and you can eliminate it by paying off the balance as soon as possible.
Disadvantages of paying off debt with savings
There are also downsides to using your savings to pay off your debt balance.
- You could find yourself stuck in a cycle of borrowing and paying down debt. Without savings, you may not be able to cover any kind of unexpected cost. If a surprise emergency arises and you need money after emptying your savings account, you may need to borrow again. Constantly paying off debt and getting over it can be daunting and it can be a cycle you will never break.
- You may incur costs that you cannot easily borrow to pay. You can’t always charge every bill to a credit card, and funding a personal loan can take time. If you’ve emptied your savings and need cash fast, you could find yourself in dire straits and forced to use a very expensive borrowing option, such as a payday loan.
- You will lose the psychological benefits of having savings. For many people, knowing they have money in the bank provides more peace of mind than having no debt.
What is the best option for you?
You will have to decide for yourself whether you want to empty your savings accounts to pay off your debt balance or free yourself from debt. For many people, however, the risks outweigh the benefits. It’s best to leave at least a little in a savings account to cover emergencies, then focus on dealing with your debt and saying goodbye to creditors for good.
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