Jean Chatzky answers your financial question about paying off debt with savings

In honor of Financial Literacy Month, Jean Chatzky, author and financial editor for the Today Show, is personally responding to five consumer questions. Today, Jean answers Nicole’s question about draining savings to repay debt.

Question: I have enough in my savings to pay off all my creditors in full. But with an upcoming wedding I don’t want to drain my savings. Should I pay off my creditors with all my savings or should I continue to save and double my payments to my creditors? -Nicole

Answer: Hi Nicole and congratulations on the wedding! I don’t want to see you drain your savings for a different reason – the job market now is really tough. Should you find yourself out of work, you need a six-to-nine month emergency cushion in savings. It should be enough for you to live on, i.e. to cover your fixed expenses, but not a whole lot of extras. I’d figure out how much of your savings this represents and leave that amount untouched. Take the rest and use it to pay of your high interest rate creditors. Then, use new money coming in to pay down any debt left on the credit cards as quickly as possible. The fastest way to do this will be to put all your extra money toward the debt with the highest interest rate, while making the minimum payments on the rest. Once that debt is gone, move to the debt with the next highest interest rate. And so on…. Good luck! -Jean Chatzky