Save Money or Pay Debts?

In today's dismal economy, many people are facing the choice of paying their or saving money in a rainy day fund. When faced with unemployment and the rising cost of living, paying monthly credit card debts is becoming more of a luxury than a certainty for many consumers.

The solution to this dilemma depends on your personal situation. If you have a healthy savings account, and feel that you could weather the storm if you were to lose your job, then you are in a position to pay your debts without worry.

However, if you are living paycheck to paycheck and have uncertainty in your employment, then creating an emergency savings fund is more important that paying off your debts.

You have two choices in this situation: pay the minimum balances on your cards and stash all your extra cash in a savings accounts or stop paying your credit cards completely and consider debt negotiation.

Both choices have pros and cons. If you choose to pay the minimum amounts on your cards, your balances will not really diminish and you run the risk of incurring late and over-limit fees. However, your credit score will likely remain in tact and you will continue to have good relationships with your creditors.

If you choose to stop paying your credit cards all together and enter a debt negotiation program, your credit will be immediately and severely damaged and you run the risk of entering collections and incurring charge-offs. However, on the positive side, you can start saving all of the money that you would normally use to pay credit card debt and build a savings that you can later use to negotiate with your lenders and try to obtain substantial reductions in your pay-off amounts.

Also, keep in mind that tax debts are in a league all their own, and you should not stop paying these debts without consulting an attorney first. The IRS has the ability to gain control of all of your bank accounts and assets, so you should not stop paying them without obtaining legal counsel.

Are you considering debt negotiation? If so, leave us a comment.