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Generally speaking, if you've come into a little bit of money (for example, the profit from the sale of real estate), is it better to use that money to pad your savings account or pay down your debt leaving behind very little in your savings account? What factors should be considered?

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What factors should be considered?

  1. How much do you have in an "emergency fund"? If you have enough cash on hand to handle most true emergencies (maybe a few thousand dollars in case your A/C goes out or your car loses its transmission), then put everything else towards the debt. If you have a huge emergency fund but are paying interest on debt, then that money is costing you in interest payments.

  2. Why do you have debt in the first place? If you use this one-time income to pay down credit card debt but don't solve the underlying spending problem, then you'll just be back where you started at some point. Make sure you spend less than you make (ideally by not using credit cards at all) and get a grip on your budget, or your efforts will be in vain.

Remember that you "earn" money by paying off debt equal to the interest rate that you pay off. For example, if the annual interest rate on your debt is 10% and you pay $1,000 to it, you "earn" a roughly 10% annual return on that $1,000 by saving you $100 in interest over a year (plus a small amount due to compounding).

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Generally speaking, if you've come into a little bit of money ..., is it better to use that money to pad your savings account or pay down your debt leaving behind very little in your savings account?

Yes!!

What factors should be considered?

The interest rate on the debt.

If it's hair on fire CC debt... then absolutely put most of the money against that debt, leaving a minimal ($1,000 or so) Emergency Fund.

If it's a 0.9% car loan, then... there's no urgent need to pay it off instead of socking it in the bank at 1.5%.

If it's an 8% personal loan... then yeah, pay as much off as you can, but keep a larger Emergency Fund.

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  1. What's the interest rate of the loan
  2. What interest rate can you get for your savings
  3. How much would have left over if you pay off the loan
  4. What other sources of cash do you have (credit cards, family, friends)
  5. What are your expenses
  6. How likely is it that you will have a jump in expenses
  7. How secure is your income

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