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Should I put my money into a high interest savings account or use it to pay off debt?
Should I put my money into a high interest savings account or use it to pay off debt? Interest rates are sky high at the moment, with the primary driver being inflation. The Reserve Bank aims to keep inflation within a target band of 1-3% however it’s currently sitting at 6%; expecting to fall to 4.5% by the end of 2023. With personal loan, home loan and business loan interest rates so high, why are savings acounts so high also? The Reserve Bank will often raise interest rates in an inflated market to stabilize borrowing and spending; this gives savings accounts an added edge as they try and stabilise New Zealanders’ spending.
Watch Instead: Should I put my money into a high interest savings account or use it to pay off debt
Many of us feel like there’s a lot more money going out of our accounts over the past two years than money going into it. That may leave you pondering whether you should open a high-interest savings account to get a good return on investment OR pay down your debts such as your mortgage, car loans etc. So that you don’t have to fret as much when interest rates rise. In this article, we’re going to demystify this decision for you, helping you decide what is the best decision for your financial situation. But beware making the wrong choice with this decision can cost you hundreds of thousands of dollars, so don’t take this decision lightly.
We’re going to be using infographics to visualise the things you need to consider when deciding whether to put your money into a high interest savings account or towards debt; and what we’re really talking about here is opportunity cost. That’s the cost of making one decision over another decision. I.e. if I make decision A, am I going to be losing out on something in the short or long-term as opposed to if I had made decision B.
I could have gone with B and made more money or actually put me on the right path long term, it’s better. Let’s look at this. I’m using a visual today because it’s a lot easier to see visually what’s happening.
Firstly, you’re going to want to consider your financial goals; you’re wanting to get ahead, make more money over the long term and set your future-self up with a good life, but currently, you’re hurting financially. So you have money in your wallet, but what the problem is that all this money is going out to the bank in interest payments.
You have car loans, you have credit cards, have personal loans, a mortgage etc. And all this interest is going to the bank. All of this mounting interest with rising rates is making you feel the squeeze.
Decision A – Getting a high interest savings account
What this means is you put money in with the bank and they give you a little bit back. You put some money into a high interest savings account and the bank gives you back a little money in interest.
As you can see, there’s still a huge, disproportionate amount of interest going to the bank and out of your wallet, even if the bank is giving you a little bit of money back. Keep in mind that this is not even considering that inflation is already devaluing your money every single day and every single year; this is purely based on the interest that you get from the bank or are paying to the bank. While setting up a high interest rate account and putting $5k-10k into it and getting 5% interest back on your money may seem like a good plan, it’s nothing compared to the 6% interest that you’re paying on hundreds of thousands of dollars worth of mortgage debt, car debt and other debt you have.
Decision B – Paying off your debts
Let’s now look at the opportunity cost. Instead of setting up a high interest savings account, you put your savings towards paying down your debt instead, which eliminates one of these arrows.
What that means is that now, over time, you’ll eliminate some of the interest and then more of the interest in huge chunks as you’re not paying your debts back with the minimum repayment amount.
So instead of gaining a little bit of interest back, you’re actually plugging up these holes in your wallet that are leaking money to the bank, which is a much better strategy as this can save you tens of thousands to hundreds of thousands of dollars over the term of your debts as you’re no longer following their minimum repayment schedules and you’re getting to keep more of your money that otherwise would have been going towards interest repayments.
Once all of your debt has been paid off, if inflation is still high and you can still get a good return on investment from opening a high-interest savings account, do it! It’s a great way to make your money more productive than for it to sit in a transactional bank account, or even better, invest it in something that will give you an even higher return like property.
In summary, look at the opportunity costs of your decision and make sure that you are going to get a net benefit and not just a teeny bit of a benefit. Paying off your debt is always going to stop all of that high interest going to the bank.
If you’re still on the fence regarding this decision as to whether or not to open a high interest savings account or are wanting to put a plan in place to attack your debts, book in a 15-minute financial coaching chat where we can give you a review of what is going on with your current debts, especially if you have a mortgage. We specialize in helping you pay it off as soon as possible so you and get those stop gaps into your wallet and start paying a lot less in interest repayments.
Keep in mind this article is providing general information and not individual financial advice.
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