William Penn Life, 2000 (35. évfolyam, 1-12. szám)
2000-11-01 / 11. szám
Savings or debt reduction: which should come first? Earn extra interest on your WPA annuity Between September I and December 31, 2000, all WPA annuity contracts will earn 6iA% interest. That’s a bonus of /a % for the last four months of the year. If you don’t already own a WPA annuity, you can still take advantage of this end-of-theyear bonus rate. Call your WPA representative or our Home Office toll-free at 1-800-848-7366 and sign up for a WPA annuity TODAY. by Gary Foreman, www.stretcher.com When planning a budget should you use extra money to pay off credit card debt? Or, should it go in a savings account? This is one of those situations where the right answer depends on the type of person you are. Whether you're paying off a credit card or putting money into a savings account you'll get a return on your investment. When you repay debts you're paying back some principal this month to avoid owing an even greater amount next month. On the other hand, you could put the money in the bank or a money market account and earn interest that way. When you include taxes in your calculations, it appears that, most of the time, you'll earn more on your money by paying off your debts first. So, why would anyone suggest beginning a savings program first? The answer is fairly simple. Some think it is essential to stop using credit cards as a crutch. The scenario works like this. Suppose you use extra money to pay off debts. You're doing good until the car breaks down. Since you don't have any savings, you'll pull out the plastic to pay for the repairs. Naturally, you won't be able to stick to your plan this month. But, you do get back on track. And you stay there until two months later when the water heater dies. One plumber later you've added another $350 to the card balance. And you're beginning to get the feeling that maybe you can't eliminate the credit card debt. Soon you throw in the towel and begin to charge up a storm just like the old days. Those who think that savings come first believe that you are more likely to be successful if you follow a different path. They tell you to pay cash for everything you buy. Or, if you just can't cut up the cards, at least to pay for any new purchases completely when the credit card bills arrive. No more accumulating debt. Let's replay our scenario. You face the broken car test. But instead of breaking out the plastic, you have built up some savings over time and use that to pay for the repairs.A couple of months later it's the water heater. Again, you dip into savings for the repair. By now your savings are pretty well depleted, but you still haven't had to use a credit card. Your resolve to not add any extra debt is still intact. And that's the key. Those who favor saving first say that people need to draw a line in the sand (i.e., no more debt) and enjoy some success (i.e., paying an "emergency" bill) if they're going to stick with a program long enough to pay off their debts. So who's right? That really depends on you. If you have trouble overcoming obstacles, then perhaps you would be better off to save some money first and resolve to pay cash for any new purchases. It might take you longer to get out of debt, but you'll have fewer disappointments and reasons to give up along the way. On the other hand, if you're a persistent person, you'd be better paying the debts first. Sure you'll face some months when unexpected bills interrupt your progress. And you'll need bulldog determination to stick with the program. But, paying off your debts first will generally give you a better return on your money. |"|l|,l Gary Foreman is a former Certified Financial Planner who currently edits The Dollar Stretcher website www.stretcher.com. 4 William Prim Lile, November 2000
