I’m doing something I never thought I’d do: I’m going against “The Math.” “The Math” tells me that I should aggressively pay down my credit card as quickly as I can, throwing every spare penny at it. “The Math” says that because the interest on my card is nearly 18%, and my savings accounts only earn about 5%, that my money is better spent on that credit card balance.
And for several months, I’ve been listening to “The Math.” And it has, up until now, served me well: I’ve managed to get my credit card debt down below 75% of my limit. This isn’t great, as far as my credit score is concerned, but it’s a definite improvement.
But “The Math” does not know all, and it’s time for a change. A temporary change. I’ve reduced my credit card payments to the minimum plus $1. Why the minimum plus $1?
- It looks better on my credit report, because it doesn’t show up as “the minimum payment.”
- It makes me feel better, because I’m not making “just the minimum payment.”
- It brings the payment up to a nice, round $40, which appeals to my number-based brain.
And the money that was previously earmarked for my credit card is now headed for my newly formed emergency fund. I want some security. I don’t want to worry that my car is going to break down and I won’t be able to pay for it. I don’t want to panic if my income drops one month. And I definitely don’t want to have to borrow more money if I hit a rough spot.
But “The Math” shouldn’t worry – I’ll be back for that credit card debt soon enough.
I totally understand.
I am a huge fan of “the math”.
But my $1000 emergency fund makes me feel surprisingly (to me) at peace and mellow. It is like a weight was lifted from my brain.
I have a friend who uses this logic as well. She has credit card debt but focuses on creating an emergency fund as if that “somehow” creates more security than having a smaller amount of debt.
It doesn’t. If you create a $1000 emergency fund and carry $1000 more on your credit card, what happens if you have a $1000 emergency? You pay it from your emergency fund.
If you create no emergency fund because you paid that money down on your credit card balance, what happens if you have a $1000 emergency? You put it on your credit card, of course, and your card now has $1000 higher balance (i.e. you are in the same place as the previous paragraph).
In the meantime, you are poorer by the amount of interest difference between the 5% you earn and the 18% you pay and it takes that much longer to get out of debt and achieve some real security.
This is an unsound strategy to save you the feeling that you are backsliding. That may be worth something. Peace of mind (even imagined) is something. But don’t be too dominated by the idea. The real financial security will come from having that expensive debt gone, and doing it by the math will get you there faster.
Don,
Except for in my case, many of my bills simply cannot be paid by credit card. Yes, if my car broke down, I might be able to pay for repairs with my credit card, but if I lost my income, I would not be able to pay all of my bills.
Humph. I guess there is some logic there. That’s a good point.
I have this sort of emergency fund, but for me it is called my summer fund. Since I drive school bus and don’t work essentially all summer. I have to work all winter to make enough to be able to live during the summer and because I don’t work in the summer I tend to want to do things, so I need that money to say go to the zoo.
So my emergency fund runs short right now…but I grow it as large as possible by June.
I try very hard not to use any credit cards. Those are my backup emergency fund. Aaaahhhh when I have to use them it sucks.
For me, having an emergency fund gives me great peace of mind. I would rather have it sitting in the bank than have paid an extra $1000-$1500 on my debts during the time I was saving. It has already saved me in an instance where I needed to write a check to someone where a credit card would have been of no use.
You’ve got a car !? … luxury, luxury, luxury.
Brian,
I have a car because I live 20 miles away from my campus – where I go to class and work. My car was partially a gift from my grandmother. It is my biggest expense, but it allows me to live off campus, at home with my parents, which saves me $3,500 a year.
So … you get to take classes while you work, live with your mom and dad, you have a generous grandmother, and you drive to work and to school in your own car. Tell me at least that you don’t have a cell phone.
Brian,
Actually, I do have a cell phone. I’m not sure what point you’re trying to go at, however. Yes, I have my own car. Yes, I’m getting a higher education. These things have been well addressed throughout this blog.
I could better address your concerns if I knew what you’re trying to point out.
Stephanie,
The “peaceful” feeling you carry by having the emergency fund is one thing. But I think the practice of building the fund also teaches you (at least it did for me) something in the process of adding on a regular basis to the fund. It proves to yourself that you can save money, your can control how your money behaves. It puts you in control of where the coins are going, instead of them flying out.
The emergency fund also let’s you win and seeing the balance go up. For whatever reason the credit card bills seem to move downward ever so slowly.
Keep building that fund because the “unexpected” is expected sometime.
I wish ore young people would grab hold to the problems debt causes in their lives!
All the Best,
Gary
I almost always focus more on getting out of debt before I work on putting monies into my emergency fund. Besides putting more into it, I haven’t touched my emergency fund since it’s creation.
The author of this article MUST be a Dave Ramsey fan! All the advice that I get from Dave is sound. If you haven’t heard of him; your missing out. The article was good for a Dave Ramsey non-listener… but the rest of the folks it was all just a common sense refresher. Baby step 1.
For the record, the author of this article is not a Dave Ramsey fan.
Contact your creditors to work out payment plans with each of them. It is very important that you stick to these agreements of course, or you will damage your credit even further. Once you have a plan in place, they will not report negatively to the credit agencies and you will be paying down the balance bit by bit.