Members CU Blog

Stop Saving (Really) And Pay Down Debt

Written by CarlaL | Feb 22, 2011 7:03:22 AM

There is no denying that it has been a rough couple of years for dividend rates at financial institutions all across the country. I am constantly asked when savings rates may start to rise again. Unfortunately I don’t have a crystal ball that will predict the future. If I did I would have already won the lottery or made a killing in the stock market and wouldn’t be writing this blog.
Let’s face it returns on savings just aren’t very good right now. Even here at Members Credit Union, where rates exceed most other financial institutions, our Money Market account only pays .50% APY. That means if you have an average daily balance of $1,000 you will earn about 41 cents per month (less than a can of soda from a vending machine) or $5 a year, barely enough to buy a cup of joe at your favorite local coffee shop. However, compare us to other financial institutions and we come out smelling like a rose. Money Markets are as low as .02% in some banks. A $1,000 balance will earn you a whopping whole twenty cents over a year. I mean really what is the point? You can find more than those two dimes in your couch cushions over a year’s time.
I read other blogs and articles all the time about how everyone needs to save more and I agree to a point. Don’t get me wrong I think saving is a good thing and everyone should have an emergency fund of at least three months living expenses in a savings or money market account. But, if you are carrying a ton of debt you may want to consider using some of your savings to pay off high interest rate loans and forget about saving for a while. I know people will read this post and say I have gone stark raving mad. No CEO of a financial institution tells its members to stop saving. Bear with me and you just may see my point.
Let’s say you have a $1,000 balance on a credit card with 18% interest and you want to pay it off in a year. You can make 12 monthly payments of $91.68 and get the job done. However, you will pay $100.16 in interest. Instead take your extra $1,000 savings in your money market account and pay the loan off immediately and start putting the $91.68 a month you would have paid on your credit card back in your money market. You save a hundred bucks in interest right off the bat by paying off the loan and you will have $1,100 in your money market account at the end of the year. When savings rates are so low and you have high interest rate debt you can see you may be better served to pay off debt first. Actually by paying off your debt rather than keeping your money in that .02% money market account you are 49,980% better off!
It is simple to devise a plan to make yourself debt-free. Consider using savings and whatever disposable income you have to start paying down your debt. Start with your highest interest rate loan first and pay it off while making minimum payments on your other obligations. After the highest rate loan is gone move on to the next highest rate loan. Keep it up until you have gotten rid of all those credit cards and high interest rate loans. It may take you several months or even a couple of years to get your debts paid off. Trust me it will be worth it to be debt free. And when rates do go back up you can put all of the extra money you have from paying off your loans into a savings account.