Sunday, July 1, 2007

To Save or To Pay?

A lot of personal finance "experts" insist that you start saving for retirement right now so that interest you earn will be compounded until you actually reach retirement age. This makes sense when you look at the magical properties of compound interest over the course of a lifetime. It doesn't make sense, however, if you currently have debt with higher interest than your investments.

Should I do both?

Not really. If you have credit card, loan consolidation, automobile, or any other debt with higher interest rates than your investments you should stop saving until you get that debt paid off.

What about the money I've already saved?

I'd recommend you keep enough in savings to take care of any emergencies ($1000 - $1500) and use the rest to pay down your debt. It just doesn't make sense to have money sitting in the bank earning 3, 4, even 5% interest if you have debt that's costing you higher. Pay off the debt. It's costing you.