The best place for extra cash
Credit Cards or Emergency Savings First?
|Savings Strategies for Young Adults|
Emergency Savings or Credit Card Debt First?
I have been paying extra on two credit cards, and I like to see the balance go down. If I want to build savings like Dave Ramsey suggests ($1000), I would have to reduce payments to the minimum for about seven or eight months. What do you suggest? Should I attack the credit cards or be safe and build emergency savings?
Pay Minimum on One and Save Difference
I would pay the minimum on the one with the lowest interest rate. Pay extra on the one with the highest interest rate and start the savings with the extra money. Without a savings, you'll never break the habit of using the cards. In an emergency, you'll have no choice but to use the cards. If possible get a temporary part-time job or sell "stuff" to help build up the savings.
Definitely Emergency Savings First
If you are following Dave's program, you know to save the $1000 first! Make minimum payments to the credit cards and have a garage sale, sell stuff on eBay, get a part-time job, work overtime, etc. to get the $1000 fast. If you don't have the emergency fund, "Murphy" will come knocking at your door. The emergency fund is your cushion so that if an emergency happens, you aren't going back into debt.
Compare Interest Charged Vs. Interest Gained
When you compare the interest charged on your credit card to the interest gained in a savings account, most experts agree that you should pay your credit card off first. You may have a few setbacks if emergencies do occur, but in the long run, you will save more money by paying down your credit card first.
Suggestion for This Common Question
You ask a question about emergency savings and credit card debt that most of us face. While some may disagree, I suggest you:
- Put your credit cards away. Lock them up and promise yourself not to use them. Pay cash or pass on your purchases.
- Organize your credit card bills in descending order based on the card's interest rate, putting the highest interest rate card first and then the second highest, etc.
- Plan to make minimum payment to all except the one with the highest interest rate.
- Pay as much as you can toward the card with the highest interest rate until this card is paid off.
- Repeat with the card that was the second highest. (At this point, it will be the one with the highest interest rate.)
- As the last card is paid off, put what was your credit card payment into your savings account. Try to build this account to equal at least eight months of your basic living expenses.
Stop the Vicious Cycle
Unless you can pay the credit cards off completely within a few months by paying the extra, I'd go for the emergency savings. If not and an emergency comes up, you'll have to use a credit card to pay for the emergency, and then pay interest on it too. That's a vicious cycle.
Lisa C. in Portland, OR
Take the Next Step:
- Make sure you're getting the best CD rate. Use our simple CD tool to find out. It's completely private, easy to use and you'll know what rate is available to you in seconds!
- Get the interest you deserve! Compare money market and savings account rates with our best rate finder. It only takes a minute and your privacy is completely protected.
Share your thoughts about this article with the editor: Click Here
Debt from my past is preventing me from saving for my future! Tell us: Yes, debt is hindering my ability to save and I could use help dealing with it! or No, debt is not a problem but I am trying to get ahead financially!
More Money Tips & Tools
- Could you be losing thousands of dollars a little at a time?
- Is your financial behavior rational? Or not?
- Avoiding the 'same as cash' trap
- Saving-money secrets of the rich and frugal
- 5 low-risk ways to earn higher interest now
- How to save money fast
- 7 IRA withdrawals that don't trigger a penalty
- This week's Readers' Tips