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Canajun Finances Home » Debt and Savings: Another Big Difference

Debt and Savings: Another Big Difference

It dawned on me after reviewing my post on I’m Not Paying My Debt. Still, I am Saving Money. While Savings and Investing have some attractive points to them (i.e., it is much more glamorous to say you are saving than paying off debt), debt has a few particular traits associated with it that cannot be ignored:

  1. Debt never goes away all by itself, you must make payments on a debt for it to disappear (unless it is a family debt where someone is kind enough to forgive the debt).
  2. Debt grows no matter how good or bad the economy is. It may even grow faster in a growing economy (if interest rates go up). Debt growth without servicing it is inevitable and can be pretty explosive.
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Can I compute with this?

This is in contrast to savings and investments:

  1. Investments and savings can disappear like a fart in the wind, given some dire circumstances. Savings maybe not as volatile (although the folks with Savings accounts in the Savings & Loans in the 80’s might disagree), but any money that is invested can lose its value.
  2. Growth of your investments or savings is not guaranteed (unless you buy a GIC, I suppose). When you invest you sign documents saying that you realize this is the case.

Isn’t that interesting? So the sure thing to invest in is to pay down your debt since you know pretty much how much you will save by having your debt paid off, and this is the only way to make it go away.

Yes, I know I am overly simple in my arguments, but something to keep in mind if you wonder whether you should save Money or pay down debt.

Feel Free to Comment

  1. I would turn to paying off the debts first. It is really important to have no or less debts so that the interest you will be paying will go to the savings instead.

  2. I agree with one proviso. A mortgage to me is somewhat different. We saved in our RRSPs and TFSAs as well as paid down our mortgage. We didn’t want to end up “house poor” if we lost a job or whatever and needed emergency savings for a few months.

    I agree with what you mean though: debt’s gotta go!

  3. I agree very much with paying off debt. The only thing I take into account sometimes is if the interest on the debt is deductible. In that case, I would always suggest to pay off non-deductible debt first. But yes – I always agree – pay off the debt.

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