Time now for our save more segment of the show: I know lots of smart people who have a good-sized savings account and credit card debt. And that is just dumb.
Oh, did I say that out loud? Refusing to use a savings account to pay off credit card debt is like barricading your front door for security, but then letting thieves waltz in and out your back door.
I know, I know, people feel it’s important to save for emergencies. Trust me, credit card debt is an emergency. It is sapping your financial strength. Think of it this way: You can instantly make a “profit” by using low-interest savings to pay off high interest credit card debt. Hey, maybe this should have been a “make more” segment!
Here’s the rationale: If your credit card charges 17 percent interest and your savings account yields just two percent interest, you can make a 15 percent “profit” —I have my fingers up in air quotes right now— by using the savings to pay off the debt. Money managers would kill to make that kind of gain in the stock market!
Still not convinced? let me do the math for somebody who has $10,000 worth of credit card debt. That $10,000 at 17 percent credit card interest, will cost you $1,700. AND that $10,000 in a savings account at 2 percent interest will only earn you $200. SO, you can SAVE —or “make” $1,500 by using the savings to pay off the credit card debt.
|
Rate |
Interest |
|
Credit card debt @ 17%: |
$1,700 charged |
|
Savings account @ 2% |
$ 200 earned |
|
BIG SAVINGS= |
$1,500 |
If this numbers-based argument didn’t convince you and you are STILL clinging to the idea that you need a large savings account in case of an emergency EVEN when you have credit card debt, then here’s another way to think of it: You should take the sure savings and gamble on the possible costs. You are guaranteed to save money by using your savings to pay your debt. You can gamble that you may or may not have a future emergency. And, If you do, guess what? You can use your credit card to pay for it. Still squeamish? Let’s compromise. Keep $1,000 in your savings account as your comfort blankie. Send the rest to your credit card company and immediately save big money.
A couple of caveats: I am not talking about tapping into a 401k or IRA here. If you already have money in one of these retirement accounts, don’t withdraw it, because the penalties could well be worse than the credit card interest. If you are contributing to retirement accounts WHILE you have credit card debt, you should stop and pay the debt first. The one exception is if your employer makes a match, in which case you should consider contributing just the amount that is matched to get the free money. Then, use the REST of your available money to pay off that credit card.
