Debt vs. Savings: Should You Use Savings to Pay Off Debt?

You may not benefit from emptying your savings accounts to become debt free.

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Key points

• If you owe money, chances are good you want to repay it quickly.
• When you have money in savings, it can be tempting to put it toward debt payoff.
• This could be a decision you come to regret.

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Being in debt can be expensive -- especially if you have high interest loans such as credit cards or payday loan debt.

If you are working on paying down your balances and you have money in savings, it may be tempting to drain your savings accounts in order to become debt free. After all, even high-yield savings accounts have much lower interest rates than you'll pay on the majority of loans. It can seem silly to leave your money just sitting there in savings when you could use it to bring your balances down and save on financing charges.

The reality, however, is that while there are pros and cons to draining your savings dry to pay debt, you may be better off avoiding this move. Here's what you need to know to help you decide.

Advantages of repaying debt with your savings

Here are the biggest benefits of repaying debt by draining your savings:

• You can save on interest. The sooner you pay off your balance, the more you can reduce the interest you're sending to creditors.
• You can eliminate a monthly payment. If you pay off your debt, you can redirect the money you were sending to your creditors. This provides more flexibility in your budget, making it easier to live within your means and to save more later.
• You'll have the peace of mind of knowing you don't owe. Debt causes psychological stress for many people, and you can eliminate this by repaying the balance ASAP.

Disadvantages of repaying debt with savings

There are also some downsides to using your savings to pay down your debt balance.

• You could get stuck in a cycle of borrowing and paying debt. Without savings, you may not be able to cover any type of unexpected cost. If a surprise emergency occurs and you need money after draining your savings account, you could end up having to borrow again. Constantly paying off debt and getting back into it can be discouraging and it can be a cycle you never break.
• You could incur costs you can't easily borrow to pay. You can't always charge every bill on a credit card, and it can take time to get a personal loan funded. If you've drained your savings and need cash quickly, you could end up in dire straits and be forced to use a very expensive borrowing option such as a payday loan.
• You'll lose the psychological benefits of having savings. For many people, knowing they have money in the bank provides more peace of mind than being debt free.

What's the best option for you?

You'll need to make your own decision about whether to empty your savings accounts to pay your debt balance down or to become debt free. For many people, however, the risks outweigh the benefits. It's best to leave at least a little in a savings account to cover emergencies and then shift to focusing on dealing with your debt and saying goodbye to creditors for good.