Money in the bank spells security, while debt can lead to insecurity. And, credit card debt might have a way of snowballing unless you pay off your entire balance each month. So should you give up some or most of your savings to pay off those debts, or should you continue to accumulate cash against that inevitable rainy day?
Your Best Interest
Conventional wisdom says if you’re paying more in interest on your debt than you would get by saving or investing, you should pay down the debt. When interest and investment returns are in the single digits, and credit card interest is 15 percent or more, paying off cards sounds like it could be a no-brainer.
On the flip side, the next emergency could put you right back into the credit card debt cycle. Some advisers recommend saving as little as three months’ expenses as emergency cash. In times of high unemployment, you may need as much as nine to 12 months.
Prioritize Your Debt
While you should never forego paying back any of your debts, you can prioritize which ones to pay off first. And just because you pay the minimum payment, doesn’t mean you can’t pay more toward your balance.
Your first priority is paying bills you owe in full – utilities, rent or mortgage, car. Then, consider paying the debts that hold the highest interest rate first – usually credit cards and retail lines of credit.
Save for a Rainy Day
Next, set a goal for saving three months’ worth of expenses, which you can determine through budgeting. One approach to saving is to set multiple goals for yourself – perhaps two months’ worth of expenses, six months’ worth, etc. When you’ve reached your first savings goal – having enough money set aside to cover you for two months – increase the amount of money you pay towards paying down your debt. Do this again when you have six months’ expenses saved. When you’ve saved enough for nine months, start directing all your additional cash to paying off your debt until it’s paid down.
About the Author
Nannette Croce is a certified paralegal who has worked as an employee benefits specialist and counseled employees on retirement preparation, including financial and estate planning.
This article is provided for general guidance and information. It is not intended as, nor should it be construed to be, legal, financial or other professional advice. Please consult with your attorney or financial advisor to discuss any legal or financial issues involved with credit decisions.
Published by permission from ConsumerInfo.com, Inc. © 2013 ConsumerInfo.com, Inc. All rights reserved.