Paying Off Debt Vs Saving.
I recently was confronted with a situation that stood out as a clearly emotional money strategy that did not make any sense logically. Someone I heard of had $10k in a savings account (earning 1/2%), that was making them feel really secure, but at the same time they had $20k in Credit Card debt (at various interest rates all above 20%).
I don’t think you need to be an ‘A’ student in maths to see the problem there! There is almost $2k a year going out in interest unnecessarily.
However, it’s easy to see how someone in this situation would feel when confronted with the decision to pay the $10k in savings, off their debt. That would leave them with nothing in savings but still with $10k in debt. That’s not a good feeling!
If something were to go wrong, out would come the credit card and the debt would grow bigger with absolutely nothing to cling to to reduce the feeling of financial despair.
However, in reality that $10k in savings was giving these guys a false sense of security.
Here is how I can make it really clear as to why.
If you had $10k in Credit Card debt but you were still $10k away from your credit limit on one of your cards, would you go and get a cash advance on that card and put the money into a savings account to make yourself feel better?
I hope every sinew in your body is screaming out ‘NO WAY!”
Thinking about it that way helps to put what these guys are doing into perspective.
I do think saving when you have debt is a good idea, but my thinking would be to set yourself a savings target, maybe $600 just as an example, and when you hit that target reward yourself with $100 cash and pay $500 off your debt.
Rinse and repeat! Do that over and over again.
When the debt is gone add the previous debt repayments to your savings each week and really get some traction! See that savings grow towards achieving a goal that is really worth saving for!
The lesson here is that sometimes you need to step back and look at your situation in a through a different set of eyes to see what is really going on, however it is really hard to do that for yourself!
No matter what you’re situation is I think that having a chat with a Spending Planner would be a really positive step. Nobody deliberately has trouble with money, but it happens just the same!
That’s all for today.
Till next time, by for now!