Why do people have a savings account when you’re in big time debt? When I used to work at a bank in Atlanta, I used to see thousands of people that had a savings account (earning 1.5% interest) and a maxed out credit card with an interest rate of 15% or more. This makes no sense at all. When you have an interest rate that is higher than the savings rate, you need to lower down your credit card balances before you save. Some people think that having an emergency fund is worth having even though you are in debt. I don’t really think that is true.
Example: You have $2000 of credit card debt (14% interest
You have $2000 in a savings account (4% interest)
Credit card monthly payment is $40.00
Total interest paid monthly ~$22.00
Savings account interest yearly payment is $80.00.
Monthly interest ~$6.00
Total loss of $16.00 per month or $192.00 per year.
Now just look at the figures. As you can see that is a difference of 10%. If that doesn’t turn you away maybe this will. Your income on that 4% is taxed, while the credit card debt is not tax deductible. This kind of situation you are being penalized to save. Pay off your balances then save.
After you pay off your credit cards then you can start pumping money in your emergency fund. If a situation does end up coming up and you don’t have any money in savings then use your credit cards to save the day again. Yes, you will be in the same situation as before, but you will still be saving a lot more money by paying credit cards off first.
If you are currently in this position don’t feel bad. I’ve been looking around many financial blogs and there are tons of people doing it. *including some authors that run the blogs?!?*
Great Calculators
Debt Evaluation Calculator
Debt Reduction Planner
Why save when you’re Broke
October 9th, 2006 at 08:33 am
October 9th, 2006 at 09:26 am
October 9th, 2006 at 09:51 am
Personal Finance is about behaviour. The method that works best for a person is the method that works best based on how they think and act. It might not be technically the best way to do something but it will work whereas the "perfect" way might not work for that person.
October 9th, 2006 at 10:14 am
When you involve emotion and take away the math part of the equation is a big mistake. If it makes you sleep better at night to have a savings account even though you have credit card debt (that you could easily pay off) be my guest. USUALLY the right way to do it is mathematically, because finance involves numbers.
*You know who got the best return on their portfolio till the year 2029? Not Warren Buffet%u2026 but the T-800 Model 101. The terminator is a cold, calculated killing/investing machine. He has a neural net learning computer instead of human emotional response system. If you invest like him you may also become the governor of California.
*J/k.
October 9th, 2006 at 10:17 am
October 9th, 2006 at 10:23 am
October 9th, 2006 at 10:44 am
October 9th, 2006 at 10:52 am
October 9th, 2006 at 11:31 am
Did it pass the geekmaster number test? According to you, no. However, it did allow that when something else errupted that I had not yet discovered I needed in my spending plans I could cover it with cash. ie; the car needing a new whatsit at 350.00. If I'd of had zero savings then it would have also had to go on the CC. This way I might zero out my little bit of savings, but by cracky I didn't put anything else on the dreaded CC. This scenario did happen to us as we began the turn around from no savings to having a years worth in the EF.
I NEEDED to have the cash reserve. Emotionally and financially.
I vote for saving SOME PORTION of your current income while paying as much as possible towards those CCs. Let's see, how'd I do it? If I recall when we had 200.00 to use, it went something like 50.00 to savings and 150.00 to CC. Agressive credit paydown while still allowing a bit to begin building up. I don't know how it would work for you but 4 years later we have a years salary PRETAX in savings and paid off apprx. 10,000 in CC debt and about 6-7 thou in car loans and continued to eat and have utilities, etc. All on a low 5 figure income.
If people can't cut it emotionally on the desires - then they most likely WON'T do the financial necessities or even see the reason for it. Give people a REASON (emotion) then they will find a way to make the financial happen.
YMMV.
October 9th, 2006 at 11:50 am
October 9th, 2006 at 11:55 am
October 9th, 2006 at 11:58 am
October 9th, 2006 at 12:01 pm
October 9th, 2006 at 12:20 pm
Emergency Funds are a huge deal. That said, when I started out, I hedged my bet towards paying off my credit card first. Actually, before that, I saved a few hundred dollars for myself before I really got cracking on it. A few hundred makes sense since I had to have some way to cover myself while I was knocking the CCs.
After that was done, I used it as my Emergency Fund while I was knocking down my car loan, and now my student loans.
Of course, I also never in my life thought I would actually end up getting divorced... and lawyers are very, very expensive. But very necessary because I did not want to get screwwed, which would at the very least screw me out of even more money in the long run.
Of course, because lawyers are very expensive, and because my divorce is not actually official, I've decided that it would be in my best interest to build up a normal emergency fund rather than to beat down my student loans (which is fairly low to begin with, at ~5%). Which is where I am at this point because I currently have no credit card debt....
I guess my point to all this is that my real life needs and situations dictates how I really plan and strategize my personal finances. From a purely mathematical standpoint, it makes sense to pay down the credit card first. In fact, you'll get no argument from me. However, that's also under the assumption that you won't run into any realistic financial pitfalls that won't put you back into deep credit card debt. In the end, which way we go (and how far, because we can technically do a little bit of both) depends on where we are in life.
October 9th, 2006 at 02:05 pm
I do all I can to pay my credit bills off each month but ,from december to march I play catch up. I don't have any kids but ,I do try to buy gifts for my
sisters kids. Thouse gift are what put me in hot water.
No matter what going on in my life financial I still try to have a saveing account to fall back on.
October 9th, 2006 at 05:09 pm
October 9th, 2006 at 05:57 pm
So you’re saying financial literacy is a problem? Your major better be incredible to spend that much money on. Fox news did a 2 hour special saying that expensive schools with expensive majors don’t end up paying off, so best of luck for you.
I've been working since I was 14 and before that I saved my allowance. When I was young, I wanted to know how to get rich and still be a teenager, so learned the valuable lesson of spending wisely. There's a reason why our country is going down the toilet and it's because people don’t learn about savings at all when they are young. It is not your fault. I blame the education legislators that think personal finance shouldn’t be a priority. If we don’t change the way our kids grow up our country will end up failing. *read more here*
http://www.efipo.com/20060803/are-high-school-students-learning-about-life/
At what point did I judge you? Asking where you got a student loan of 15%? One of my best friends just graduated with 2 masters’ degrees from one of the most expensive colleges and needed Federal and private loans and none of them went over 8%. I think you need to re-evaluate your loans and see if you could get early consolidation. That’s what I did.
I do think it's funny that you pretty much answered your own argument. You’re in debt and "not all of us can afford to buy a home at the age of 23" because you were “too busy being a teenager”. Planning at an earlier age allows you to reap all of the benefits of compound interest. Instead of buying candy bars all the time I saved my $1.00 and put it in my savings account. If you think that is an awful way of living, please excuse me. But I would rather not work all my life unless I want to.
Good argument though.
October 10th, 2006 at 06:26 am
This is where you were judging. I do nothing of the sort. And I dont disagree with you that kids should start saving earlier. Acutally, I wholeheartedly agree with you. I do not,however, agree with judging and/or insulting those who didn't get that kind of financial education at such a young age. And I also agree that my interest rate needs a little evaluation... I hope my salary as a psychiatrist when I get out of college and med school will pay off the debt I rack up now... I understand that college is an investment. And honestly, my current university was the cheapest I could go to in the city. And I'm not putting down your way of doing things. If it works for you then I support it entirely. I support anybody's way of handling thier finances if it works for them, I was merely pointing out that it does not work the same way for everyone, and harshly criticizing the methods in which people save while they try thier damndest is a little unfair. I dont think it's right that I should feel offended while I'm doing all in my power to save my money and not be heavily in debt when I get out of college, and I think the same goes for anyone else taking action to change thier situations.
October 10th, 2006 at 09:28 pm
What does that mean?
October 10th, 2006 at 10:17 pm
Now I know that some people do not agree and want to add emotion to the whole equation, but if you look at it mathematically, which most of the time you should do, it does not make sense having a savings account with CC debt.
That's all.
October 15th, 2006 at 07:06 am
I've known people who have done everything perfect and by the book and then when they reach middle age and go crazy(wine, women and song)because they haven't had any real life experiences. Their bored! So be careful being so smug
October 15th, 2006 at 09:00 am
Giving the reason on a mathematical basis doesn’t give me smugness. If you want to argue with math then do it. This whole post and peoples arguments are based on a mathematical equation of debt. If you want to argue with the financial community then there are lists of names that agree that paying down debt is much better than having a savings account. *Suze Orman, Dave Ramsey, Clark Howard, Ben Stein, ect..* Again if I offended you because I am using math as my argument then I am sorry, but sometimes taking emotion out of the equation sometimes works. I know not for everybody, but most people.
October 15th, 2006 at 09:08 am
October 16th, 2006 at 06:26 pm
October 16th, 2006 at 06:30 pm
October 20th, 2006 at 12:19 pm
October 21st, 2006 at 05:34 am
all CCs, EFs, unemployment regulations, and monthly budgets are not created equal, and the only thing that makes mathematical sense is a plan that will allow you to survive and not default on your obligations should you lose your job for a period. for some folks, that's a fully funded EF. for others, it's a cleared CC balance.
October 20th, 2007 at 03:44 am
You do the best you can. If lucky enough to have an emergency fund ... good! If got CC balance available good also. Most people make financial mistakes before they realize they are in a credit trap. To pay off the credit debt assumes that you can pay them all off and then start on an emercency fund, mean while the CC can act as your EF.
Not good to rely on CC balance. Credt card companies can change the balance available anytime. You need to work both at the same time.