Saturday, January 8, 2011

Is it Better to Pay Down Credit Card Debt or Build Up Savings?

If you were one of the lucky ones and received a end of year bonus, congratulations. You have the happy task of deciding what to do with it. Do you blow it on a new 50" 3D LCD TV or do you use it for a more responsible objective. Do you have credit card debt, why not use it to pay it down. What about putting it in a nice Roth IRA? 

You have decided to put off the big screen TV purchase for the time being and use that windfall for more financially responsible goals. Where do you put it, on your debt or in savings?

The answer depends on your own personal situation. What would boost your bottom line the most? If you go purely by the math, paying down the credit cards makes the most sense. If you consider the interest rate your paying and what it's costing you and how little you will earn in a savings account, paying down the debt seems like a good plan.

If one of your goals is to give up credit cards permanently, a nice savings account is necessary. It's hard to make progress when every time an emergency comes along you have to reach for the credit card. 

So building up a nice emergency fund of $1000 to $3000 is the way to start. Once you have an amount of cash put away for the rainy day thats coming, then go back to paying off the debt. 

If you are anxious to pay off debt faster, then do a little of both. Pay a little extra to the debt and also still put some into savings. Also it's time to get a little creative with your budget. Try for six months to squeeze a little more of your cash toward your goals. Try cutting some items from the budget to arrive at your goals a little faster. Make it a project to sacrifice some of your extra expenses, like cable or dining out, but for only six months to get the job done quicker. 

3 comments:

  1. Doing nothing special with my bonus! Goes straight to my savings account till I figure what to do with it!

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  2. I agree that the answer to this question depends on a personal situation. But to my mind, it's always better to start from paying off the debt. When finally you are debt free you can start a new financial life and focus your attention and efforts on saving money. If the budget allows, it's possible to try to pay off the debt and at the same time make payments, but probably then there no money left to cover casual expenses. For me it would be hard to make savings while I still have a debt to pay off, that's why I think it's better to pay off the credit card debt and feel free to make savings and work on financial wellbeing.

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  3. To pay off debt aggressively, you have to increase your income. If you can't do that than a drastic cut in expenses. It will take a painfully long time to pay your debt down if you combine it with saving money. But before you start to pay down your debt you better save an emergency fund, so you won't have to add more debt to the problem.

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