Thursday, October 25, 2007

Saving is Debt Reduction!

Having heard Dave Ramsey on the radio a few times, the man talks a good game. While many of his ideas are sound, I have to point out SAVING money IS debt reduction. Net worth = assets – liabilities.

Lets say you have $30,000 in student loans. By sticking to a budget, you have the option of paying off $5,000 in loans each year or saving the same amount.

Decreasing your debt by $5,000 increases your net worth by $5,000.
Saving $5,000 accomplishes the same thing.

When deciding what to do with “extra” money intended to increase risk, one must balance:
1. Liquidity – people with cash in hand have options. Savings increases liquidity and savings increases it.
2. Interest Expense – if you are paying 20% on a credit card and receiving 4% on your savings, pay off the debt. If the differences is minimal, cash is king
3. Discipline – if you tend to spend “saved” money, pay off the debt.

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