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 03:33 pm
October 9th, 2006 at 04:26 pm 1160411169
October 9th, 2006 at 04:51 pm 1160412705
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 05:17 pm 1160414248
October 9th, 2006 at 05:44 pm 1160415859
October 9th, 2006 at 05:52 pm 1160416322
October 9th, 2006 at 06:31 pm 1160418699
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 06:55 pm 1160420155
October 9th, 2006 at 07:01 pm 1160420491
October 9th, 2006 at 07:20 pm 1160421615
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 09:05 pm 1160427901
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 10th, 2006 at 12:09 am 1160438994
October 10th, 2006 at 01:26 pm 1160486769
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 11th, 2006 at 04:28 am 1160540912
What does that mean?
October 15th, 2006 at 02:06 pm 1160921213
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 04:08 pm 1160928489
October 17th, 2006 at 01:26 am 1161048413
October 17th, 2006 at 01:30 am 1161048627
October 20th, 2006 at 07:19 pm 1161371988
October 21st, 2006 at 12:34 pm 1161434040
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 10:44 am 1192877069
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.