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February 2010 - Is it good to save while you have unpaid debts?

Is it good to save while you have unpaid debts?

☳ by Adam Aspilla

Without savings you could not attain financial security. You may earn six figures or more monthly if you do not have any savings you are worst than those who live on a hand-to-mouth existence. Why? Because in case of emergency like: losing your job or getting sick and you cannot go to work, your standard of living would drop to ground zero. When that happens you could not cope up the situation like those who are already there.

To avoid such difficult circumstance, you have to practice proper personal financial management which includes a portion of your income should be set aside for savings. The question commonly ask is “It is good to save while I have unpaid debts?”

Conventional wisdom says “pay first your debts before you save”. It make sense for why save when the interest rate of your savings is only about 1% per annum, while your credit card companies charge 18% or more interest rate per annum on your outstanding debts? Furthermore, you can just use your credit cards or line of credit to take care of emergency. Therefore paying your outstanding debts first would be the logical way to do before you save. 

However, with our present global economy, a financial mismanagement of one country could adversely affect the world economy as demonstrated by the recent global recession. To prevent the happening of the same, financial institutions are starting to tighten credits. As a result, your existing credit card or line of credit limits may be reduced or totally cancelled when your credit grantors feel you become a credit risk to keep your account open.

In view of the above, the conventional wisdom of “pay first your debt before you save” is no longer a smart move for in case of emergency you are left on the cold should your credit card or line of credit is cancelled. In fact, banks could just do it without your consent, for credit is just a privilege not a right.

Therefore, it is wise to save a portion of your income while you are paying your debts. The question is how much you need to save to cover for emergency situations? There are two schools of thoughts. Some financial planners suggest you have to save up to three months of your monthly basic expenses, which include: food, clothing, shelter and transportation. While some financial planners who are more conservative, recommend to save up to six months of your monthly basic expenses. 

It is difficult to start saving if you are not used to it. You may start saving fifty or one hundred dollars a month and increase it gradually as you become used to it until you can save 10% of your net income on a regular basis. Again, in light of our changing economic condition, yes, it is good to save while you have unpaid debts to cope with emergencies which are beyond our control.

 

 

Adam Aspilla is a Senior Financial Counselor of the Debt Clinic of Canada Inc. and the author of the book, You Can Negotiate All Your Debts. He also writes a biweekly column, “What Matters In Life” in “Taliba Newspaper. For free initial, professional and confidential consultation, please call 905-306-7572.