I have had a CD since I sold my house and moved two years ago. Then I took out a lower interest rate line of credit to pay off my car, to free up some money each month and pay it at a lower rate than my car loan. Now, due to the housing boom, my taxes have risen to almost three times what they were. My homeowner’s insurance has also doubled because I am in Florida.
My questions are these:
- Should I close the CD account and use it to pay off debt and my taxes and insurance?
- Should I leave it alone and find another way to pay the taxes and insurance? ( I have a bonus that will cover the insurance or the taxes, but not both.)
Here are a couple of things to weigh (and these are just my personal opinions based on my banking experience and debt reduction experience):
1. Compare the interest rate that you are receiving on the CD versus the interest rate on your debt. For example if your CD is only earning 1% interest, but your credit card is charging you 17% interest, it makes more sense to pay down the debt.
Now bear this in mind, if your CD is your sole savings account, you may want to keep some money in there for emergency expenses. Experts recommend that you have at least 3 months worth of living expenses in a savings account. If you don’t have that much, starting an emergency only savings account with $1000.00 would be a great start.
2. I personally would do whatever it takes to make sure your taxes and insurance are paid off. If that means closing out the CD to pay for them, do it. I NEVER count on bonuses because you never know at the end of the day if it will come through. If you do get a bonus, then put that back into savings once your obligations are paid.
Best of luck! Let us know what you decide.