Invariably, every few months, we get a wave of posts talking about “what would you do if you won $x,xxx,xxx?” Or, what you would do with a smaller windfall. And invariably, a majority of the people talk about how they would save the money. And in some cases they are right. But, most of the time, they are wrong.
Why are they wrong? Because they’re looking at saving from the wrong direction. I wouldn’t save a dime of it. I would use every last cent of it to pay off debt. And until I have no more debt, that’s what I would do every time. Sure, maybe I’d by a few things that I needed, but the rest goes to debt. Saving in a savings account doesn’t do you damn bit of good if you have debt.
If you have any debt at all, you really should think twice about having any savings at all except for an emergency fund. Why? Because, there is no savings account in the world that will guarantee you more interest than what you are paying on your debt. If you pay off $100 of your credit card debt, you’ve just earned the 19% interest that you would have paid. You “saved” more with that $100 than you would have in years if you had put it into a savings account.
Don’t fool yourself into thinking you need to have anything more than an emergency fund in the bank. All the rest is just money that could be making you 19% interest instead of the paltry 1.30% that you’ll get at that high-yield online savings. When you get rid of your debt, then is the time to start building your savings!
Some of you will likely ask “what about retirement savings?” That’s a gray area. There are some that would argue that if you don’t get that debt paid off, you’ll end up taking that money out early anyways. Others would argue that due to the tax benefits of retirements accounts, and the magic of compound interest, you really should be putting money into your retirement too. My current opinion is stuck somewhere in between. I think that you should be putting a little into retirement, just so you have something going. But, I also think that you should keep in minimal until your debt is gone and then ramp it up like gangbusters.
So, what would you do if you won $x,xxx?