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Should You Use Your Savings Account to Get Out of Debt?

17 December 2012

Earlier this month, Young and Thrifty talked about using your savings account to help get you out of debt. And while some good points were definitely made in the post, especially when comparing using your savings against other alternatives such as using your credit cards; there are other practices mentioned that we believe you should really be wary of trying when using your savings account.

Much of the premise behind the post is that using your savings account is always a better choice than using your credit cards. It points to situations such as emergencies and debt servicing when this would be the most beneficial option. The article also points towards other benefits of savings accounts, such as getting people in a “savings state of mind,” and using the account to first set up a cushion; and then using it to move on to the world of being an investor. Among the good and the dangerous, this is what we think.

The Good
Y & T points towards using your savings in case of emergency, and indicates that this is a better plan than relying on credit cards. Unquestionably, this is true, especially if the emergency is the loss of a major income in the household, or another scenario which will paint a troublesome picture over a significant period of time. In these situations, by all means draw on your savings to put food on the table, pay your mortgage and other household expenses, and use to repair your roof or whatever the actual emergency at hand. This is clearly not the time to be worried about your retirement – the time for action and for using that hard earned and hard saved money, is now.

Once you start saving of course, funds start building and instead of dreading placing that extra 10 per cent of your income into that savings account, you look forward to it. Start saving often enough, and just watch what kind of game it becomes for you. How much can you save this month? How much fatter can you make that account? This is a very good benefit of savings accounts, it’s one that Y&T mentions, and it’s one that we wholeheartedly agree with.

The Dangerous
Y&T also suggests that, “Once you have a few thousand dollars to put away you can begin living out of your savings rather than your credit cards.” While this may be okay for things like those emergencies discussed above, one should never forget that your savings account is for saving. It’s never okay to get into the idea of paying for your daily expenses out of your savings, simply because that’s not what it’s there for. Create a budget for your daily expenses and spending, and spend out of that  – not your credit cards or your savings account.

The Questionable
We can see how savings accounts may become so attractive for some people that they want to move from just saving money to actually putting their money to work for them. Especially when you compare the rates of return on investments versus that of savings account. But becoming an investor of any kind requires a very specific personality, and a very specific drive to want to do it. Whether or not everyone who signs up for a savings account is going to have that personality is highly questionable, and in fact, not likely.

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