Should I use savings to clear a loan?
If you're struggling with whether to use your emergency savings to pay off a personal loan, it's important to weigh your options carefully. One reader from Hawai’i was facing this dilemma with a $25,000 loan.
Working two jobs and bringing in $1,500 each month, they managed to reduce the loan from $35,000 to $24,800 within a year while maintaining a budget.
Considering whether to use $5,000 in savings and withdraw $20,000 from a life insurance mutual fund to become debt-free, the reader would be left with no savings and no life insurance reserves. It's tempting to eliminate debt, but without any savings, they would be vulnerable if unexpected expenses arise.
Check Out: Innovative Policy Permits $1,000 Emergency Withdrawals from Retirement Plans Without Penalties
One option could save you interest on the loan and still keep an emergency fund of $5,000 if you pull funds from a life insurance policy that won't penalize you for the withdrawal. But this should be weighed against the potential need for that life insurance payout for dependents, if there are any.
Sticking to the current repayment plan will take less than three years to clear the debt and cost around $2,112 in interest. During this time, savings could grow, potentially adding $625 in interest, and the life insurance policy might see a 6% return.
The decision is personal, but understanding all scenarios is crucial before choosing a path.
Diversifying Your Investments
Is it wise to spread out investments or stick to just an employer plan like a 403(b)?
Work retirement plans like 403(b) or 401(k) are beneficial, often offering tax advantages and company matches – it's like free money. However, they may not always be the most efficient due to limited investment options and higher fees.
Personal IRAs give you control to potentially choose investments with lower fees and more diversification. You can't control returns, but taking charge of where your money goes and what fees you pay is empowering.
A mix of contributing enough to your work plan to get full benefits and investing any extra into an Individual Retirement Account (IRA) or other investment accounts could be a smart move. Traditional IRAs have tax benefits now, and Roth IRAs offer tax-free withdrawals on contributions later.
Researching all options may take time, but it's an investment in your financial future.
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