Burn your savings or create more debt?

Ask the Experts: Should we use up our savings?

We have been working on paying off our credit cards and have about 1300 dollars left. We are currently looking at a possible $2,000 car repair or buying a new car depending on potential engine damage. I’m wondering if we should increase our credit card debt or deplete our saved resources to pay this bill. We have about 2 months of every budgeted bill saved up and no other savings. Should we use this money or add to our debt? – Stephanie

Stephanie –

Sorry about your car! Having car repair bills drag me back from the brink of my financial goals time and time again I can empathize.

As for your question, there’s no right or wrong answer. Generally, I’d advise you to leave your savings alone. Having 2 months saved for every bill is great and ideally something you should avoid tapping into unless you absolutely have to. If something was to happen next week and your income suddenly stopped coming in, you’d need that savings.

But taking on additional debt’s no peach either, especially if you’re working with a high interest rate.

So there are basically two factors you should consider:

  • How much is the new debt going to cost you in the long run?
  • How comfortable do you feel operating with no safety net until you rebuild your savings?

Another thing to consider: how many of your monthly bills can be paid with credit in a worst case scenario? Maybe the solution is a compromise: hold on to the portion of your savings earmarked for things you can’t pay on credit – like your rent or mortgage. Put everything else towards car repairs or paying down debt, knowing that if an emergency happened you’ve got the available credit necessary to stay afloat until you’re back on your feet.

It’s never fun to have to dip into your rainy day fund, but if you’re smart about when and how you borrow from yourself, you’ll be able to weather the storm and get yourself back to normal much faster.

Good luck!

Jesse Campbell is the Content Manager at MMI, focused on creating and delivering valuable educational materials that help families through everyday and extraordinary financial challenges.

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