How to Get Out of Debt - Cash Out Your Savings

Cashing out your savings may seem counterintuitive to everything that you have learned about personal finance. Virtually every expert will recommend that an individual have some money set aside for an emergency or to provide for their retirement once they get older. While it is true that having savings is crucial, an individual that is under a pile of debt will need to make some hard decisions about how their money can best be put to use. As foolish as it may seem to cash out a savings account in order to pay off debt, there are some compelling reasons to do so.

Debt has an ability to grow well beyond what an individual would expect. Paying only the minimum monthly payments on credit cards means that interest gets compounded month after month causing the balance to grow rather than shrink. Missing a few payments will also add late fees which can all add up to quite a bit more than you what you owed originally. If you have money set aside, either for retirement or as a rainy day fund, it will be up to you to decide whether or not using that money to pay down your debt is the right choice.

The reason that many individuals ultimately decide to use their savings towards debt repayment is that it simply boils down to a matter of math. If, for instance, the interest on your debt is 12%, you would have to earn 18% on your savings before taxes in order to cover the money that you are spending on your debt. Since virtually no savings account pays interest at anywhere near that rate, using that money to pay off your debt is equivalent to getting an 18% return on your money without any risk.

When you look at it this way, it is easy to understand the higher the interest on the debt that you owe, the more attractive it using your savings to pay off that debt becomes. That does not mean, however, that you should use all of your savings to cover your debt. It is important to have some money set aside to cover unforeseen expenses like medical bills, home repairs, or to fix a broken down vehicle. If you do not have money to cover unexpected events like this, you may find yourself borrowing more money rather than watching your debt disappear as you originally intended.