Should you use savings or other assets to pay off debt?

If you find yourself over your head with debt, you may have several options. Some people use savings to pay debts. Others decide to sell off securities or even jewelry. However, before you empty your retirement account or sell Grandma’s antique pearl necklace, be sure to weigh all the factors. In some cases, it may be better to carry the debt.

Before you sell stocks, bonds, securities or tap into an IRA or 410K, be sure to see an accountant. He or she can tell you the tax consequences for selling these assets. If pull money out of a retirement account early, you may have to pay both taxes and penalties on it. It may be worth it if you are in a serious financial bind. In some cases, such as if your debt is related to education or medical bills, you may not incur a penalty.

No matter what you do, don’t leave yourself destitute to pay off your bills. You want to have enough money in reserves to take advantage of other financial opportunities or to cover you if a financial emergency. You can designate money or credit as an emergency fund for things that come up. Don’t use this fund to pay off credit card bills. Most financial experts recommend keeping three to six months of your monthly salary in a savings or money-market account to have for a financial emergency.

If you'll sell capital assets, like stock, bonds or mutual funds, you may get socked with a capital gains tax. Depending on the amount of money you liquidate, it’s very likely that you’ll pay a hefty tax that won’t make it worth your while to use the money to pay your credit cards. However, if you have defaulted on a mortgage or vehicle loan, you probably should just grin and bear the tax bite.