The essence of financial planning is to save money for the future to buy a house, for retirement and for whatever worthwhile purposes. However, if the interest rate of your savings is less than the interest rate of your outstanding debts, you are losing, not saving, because the exorbitant interest rate on your existing debts would wipe out many times your interest income from your savings.
There are people who insist on saving with interest rate much less than they are paying on their outstanding credit cards debts and personal loans.
A good illustration was a couple with $20,000.00 savings in a bank with an interest rate of about 1.5% annually. At the same time they had an outstanding $45,000.00 credit card debts and personal loan with average interest rate of 19% annually. They only pay minimum payments on their debts which practically applied only to interest.
Had the couple used the $20,000.00 savings to pay down their outstanding debts to $15,000.00 they would have reduced their annual interest expense to approximately $2,850.00 ($15,000.00 x 19%), and the balance of $15,000.00 was much more manageable to pay off early than the $45,000.00.
Saving is good for your future, but if you pay more interest on your existing debts than the interest income you earn on your savings, you are not saving at all, but you are losing. You cannot really start saving when you are in debt under the above scenario. Clear up your debts first and start saving.
Adam Aspilla is a Senior Financial Counselor of the Debt Clinic of Canada Inc .(an accredited member of the Better Business Bureau), A former financial planner, a former mortgage broker, and the author of the book, You Can Negotiate All Your Debts. He also writes another column, “Biblical Perspectives” in this paper. For a free initial, professional and confidential financial consultation including issues on power of sale, call 905-306-7572 or visit www.debtcliniccanada.ca