Hot topic: Grow your savings or reduce your debt?
Emergency fund or credit card balance? Security versus debt repayments. Is this conundrum a case of plastic versus prudence, or a surefire way to make your debt repayments impossible?
In this day and age, money is tight and knowing how best to deploy it is no easy task. The debate over the emergency fund versus credit card repayments is ground well-covered y many personal finance gurus.
Suze Orman, the personal finance guru from the United States, recently changed her tack on debt repayments versus emergency funds. As quoted here, Orman shifted from being a proponent of quickly paying off high-interest credit card debt and starting an emergency fund once cleared of debt.
She has now reconsidered and suggests instead that, after the minimum repayments are made on the credit card, all savings should go into an emergency fund. Some say it should be three months of a wage, others eight. That choice is really up to you.
Dave Ramsey suggests that an emergency fund set up, and that debt should then be paid off using the interest gained from the fund. The blogosphere isn’t all too positive about that suggestion, with one blogger working out the money lost on interest in the time it takes to pay the debt back.
Generally, the blogosphere is not keen on the suggestions from Orman or Ramsey, there’s no answer as to what is the more effective method. Maybe you set up an emergency fund and then the emergency never happens- you remain employed, don’t get sick and live happily every after. Or you dedicate yourself to getting rid of debt, spend three months working hard, and cut up your cards to enjoy a debt-free existence. Either method can work, so here are a couple of things to think about.
Clearing the air
If you clear your credit card, will you be tempted to fill it up with purchases again? Will you be able to control yourself and cut up your card or keep it only for emergencies? If you don’t think you have that discipline, maybe setting up an emergency fund first and then dedicating yourself to clearing your debt is the ticket.
Doctor, doctor, there’s an emergency
Should you decide to set up an emergency fund, how much will you need? When do you stop paying into the fund and start clearing your credit card debts?
What keeps you up at night?
Knowing your own personality type is important in managing your finances. Do you find credit card debt a nagging anxiety that you can’t get out of your head, or are you tortured by thoughts of what might happen if you lose your job? Understand your motivators and set up your financial plan around your personality.
Credit card debt keeps me up at night. I don’t like relying on it in times of emergency, don’t like the thought of having to pay rent with it or needing it for groceries. Even if it’s just a couple of hundred dollars, having cash is something that helps me to sleep at night. In a perfect world, I would be paying off my credit card debt at the same time as saving. Maybe that should be my February New Years Resolution.
If you had $1,000 credit card debt and $1,000 in the emergency fund, would you pay off your debt?
The best response may just get a bit of debt relief courtesy of Savings Guide =)
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2 Responses for Hot topic: Grow your savings or reduce your debt?
“If you had $1,000 credit card debt and $1,000 in the emergency fund, would you pay off your debt?” is the EXACT question I’ve been asking myself for months…do I pay out the credit card, but then diminish the savings that I worked hard for? If I pay out the credit card, will it just creep back up in a few months? If I pay out the credit card, and then encounter an emergency, will I have to use credit, therefore leaving me with no savings and more debt on the credit card?
It’s the million dollar question. I’d be tempted to one day just go ‘stuff it’ and clear the credit card debt. But I’m at a loss as to what the best option would be…
On a $1,000 example, I’m a big fan of 20% on the debt and 80% into the investments/savings account. Keep paying down the debt and when your savings has increased somewhat, whack a huge lot onto the credit card. That will bring the debt down faster and still allow you to have some money saved.
Once the cards are paid off, cancel them and get a debit card or just use cash. Then take the money you used for debts and put into savings.
I have a main investments account and a few little savings accounts where I divvy up my money every week. It’s amazing how fast even an extra $20 a week can make to your balance.
