Should I save money or pay off debt?

May 14, 2010 by Victorino
Filed under Debt Management

Should I save my money or pay off my debt? Have you ever found yourself asking this question before? Let us say, you have a debt (car loans, home loans, credit card debts, mortgage, et cetera) of $888 which is due today, and your creditor is expected you to collect that amount of money from you, will you pay off that debt? Or you will save that money and just pay the penalties or interests? If I will be the one to be asked, I will definitely pay first my obligations that are due before I will set extra money for my savings. Some people will try to save money and choose to pay interests instead of paying the principal loans thinking that they can earn more money from saving or investing to cover the incurred interest expenses. However, this notion is not financially, morally and spiritually sound. Why? My reasons are the following:

1. I want to be free rather than become a slave

“The rich rules over the poor, and the borrower becomes the lender’s slave.” – Proverbs 22:7

2 I don’t want to lose credibility

“It is better that you should not vow than that you should vow and not pay.” – Ecclesiastes 5:5

3. I don’t want to be a wicked person

“The wicked borrows and does not pay back, but the righteous is gracious and gives.” – Psalm 37:21

4. I don’t want to disobey God

“Do not withhold good from those to whom it is due, when it is in your power to do it. Do not say to your neighbor, “Go, and come again, tomorrow I will give it”—when you have it with you.” – Proverbs 3:27-28

5. Interest expense is usually greater than interest income
The finance cost of debt or loan is usually greater than the revenue generated by saving money. Hence, it is still financially better to pay off debts than to save money. If you are an investment savvy and you are thinking that the return on investments will become higher compare to the interest expense, then review numbers 1 – 4. Besides, not all ROI rates are higher than a certain interest rate. Also, interest expense may become tax deductible, but interest income and investment income may also be subjected to income taxes.

Conclusion:
If you have debts, then you should pay off them before they become due. This is to avoid unnecessary finance charges, preserve your credit credibility, promote good relationships with God and of course with people, and achieve your financial freedom. However if you have cash now, but your debt is not yet due, you can invest that money in a low risk investment schemes (e.g., money market instruments, mutual funds, et cetera) to earn more money and have a better chance of paying your debt when they become due.