Wednesday, May 26, 2010

To Save or not to Save

Should a person save money while they are in debt, or should they utilize all their free cash to pay down the debt? I have seen this question addressed multiple times on the net. Here and here, specifically. It seems to be a heavily debated topic.

From a strictly economic standpoint, one would be better off to save cash if and only if the interest rate on their savings was greater than the interest rate on their debt. For people with credit card debt, I can hardly imagine a scenario where this would be the case. In my personal situation the credit card debt is raking in nearly 11% while my savings account is paying me a little over 1%.

If you find yourself in this dilemma, the only advice I can offer is to do what feels right. If you decide to save up some emergency cash instead of paying off your debt be aware that it comes with a price; you will have to pay additional interest on your debt. With this in mind, it is possible that the benefit that is derived from the security of having an emergency fund set up will outweigh the additional interest you end up paying for delaying a full frontal attack on that debt.

This is how my family and I have tackled this subject: beginning four months ago we started paying a fixed $600 per month to our credit cards (remember that we are in forbearance on my wife's student loans and mine are still within the grace period, so we aren't making payments on them at this time), while at the same time saving roughly $200 a month in an online savings account. Now that we have a pretty good cash cushion, we are going to utilize that $200 that we had been saving to pay towards our debt. Using Microsoft Excel to do a quick and dirty amortization schedule, it looks like, at this pace, we will be rid of our credit card debt in 20 months instead of 27! Also, I think we might look into one of those Zero percent balance transfer offers that are floating around the web to help expedite our goal (more on this later).

1 comment:

  1. i'm feeling motivated. :) thanks for posting. love you.