« ClickN Read Phonics | Home | Check 4 Lead »
Use It Or Save It?
By Mommie | October 12, 2008
There is one simple rule in personal finance, always bring in more than you spend. It is just common sense. At the end of that little equation (Money – Money Out = ???) is the amount you will be able to save. The amount of emergency savings is recommended to be three to six times your monthly take home pay. This is to cover expenses for you and your family in the case of a job loss, just in time to get you to your next job and paycheck.
But if you already have credit card debt, should you pay down your credit card debt or save? This is a dilemma faced by numerous individuals in this day and age. We are all told to save, but could that potential savings be put to a better use than your emergency fund.
Well no and yes. If you have ever been caught at the end of a pink slip at work, then you will know the importance of having an emergency fund. Not only does it give you and your family piece of mind while you begin your job search, but it also can bring in some extra cash in the form of interest income. While not in active use, your emergency fund increases by the amount of interest it earns. So in that light, there is not a better use for your money, as the security may actually give you a substantial benefit that you lack.
Now if you have credit card debt, you need to understand that you are paying for the ability to buy things that basically you cannot afford. This cost is paid every month in the form of interest they charge you. Just like the balance of your emergency fund goes up every month in interest, so does the balance of your credit card. If you are paying your credit card bill off every month, there is no need to worry, but if you are making a payment of less than the balance then take heed.
The interest rates on credit cards are always higher than the interest rate on any savings account. Savings account rate range anywhere from around .10% APY to a little over 3% for some high balance accounts. Interest rates on credit cards are from around 9.99% to over 20%. So let’s do the math. The average American has around $10,000 in credit card debt, so let’s assume you have that amount as well at an APY of 10%. You also have a savings account with a $10,000 emergency fund in it with an APY of 1.50%. All other things being equal, you will be losing money every month due to the interest of your credit card being well over that of your savings account.
In this instance, it may be a good option to use some of your emergency fund to pay down your credit card balances. This would mandate that you don’t incur additional charges on your cards, but use the opportunity to get out of credit card debt. In the end it is your decision as to which road you want to take that is in line with your personal financial goals.
Topics: Uncategorized |
October 13th, 2008 at 3:34 am
[...] Read the rest of this great post here [...]