Should You Invest in CDs, or Pay off Debt?
Many of us, during these tough economic times, are torn between saving and paying off debt. In times of economic uncertainty, it can be tempting to save up money while there is money coming in to be saved. At the same time, though, paying down debt is a big goal that many have. The path to financial freedom demands that debt be paid down as soon as possible — and that the future be prepared for.
As you try to decide what might be the best option for you, it’s important to take the following items into account:
- Do you have a basic emergency fund? Many financial gurus suggest that you have $1,000 in an emergency fund before you start paying down your debt. If you don’t quite have a basic emergency fund, build that up, and then tackle your debt.
- Do you have reason to believe your job is in danger? There are usually signs associated with upcoming lay offs. Sometimes the company will even announce them. Weigh your concern about losing your job, and determine how realistic that concern is. If you are unlikely to lose your job in the next few months, do all you can to pay down your debt. If layoffs have been announced, or if you feel your job is in danger, you might want to do all you can to build your emergency fund, paying only the minimum on your debts.
- What kind of return will you get? One of the problems with putting money into CDs is that the return is quite low. Indeed, any return you get from a CD is likely to be much lower than the interest you are paying on your debt. You might be better off paying down your high interest debt before it further erodes your wealth.
Everyone’s situation is different, and everyone has their own specific financial needs. You need to examine your situation, and determine what is most likely to help you improve your situation. Consider the pros and cons of paying down your debt quickly, weighing them against earning a smaller return on CDs — even high yield CDs.
Cultivating Extra Income
Something else you could do to improve your situation could be to develop extra income streams. Developing passive income can help you either build up your emergency fund, or pay down your debt. The extra income can speed you as you reach for your goals, whether those include a bigger savings account, CD ladder, or accelerated debt pay down. Plus, passive income can provide you with some income in the event that you do lose your job.
However, passive income can take some time to build up. While it would be nice to earn income from a web site, or dividend stocks, it can take years to build up the proper income stream. Sometimes, a part time job is what is needed to boost your income right now so that you can pay down debt or super-charge your emergency fund. In any case, getting back on the right financial track is important, and you should carefully pursue those goals that will help you return to the right path as quickly as possible.