Should You Pay Off Credit Card Debt With Emergency Savings?
You have questions, we have answers. Each Monday, we’ll tackle one of your topical personal finance questions by seeking advice from several financial experts. If you have a general question or money issue, or just want to talk about something PeFi-related, leave it in the comments or email me at [email protected].
This week the question comes from jpomonkey who asks:
I have a $ 2,000 credit card debt at 6.9% and $ 4,000 in savings. Do I have to pay off my credit card debt in full or continue to pay every month and increase my savings account? I own a house and am worried about having some extra money on hand in case something breaks.
This is what individual experts usually say about a problem that affects each person differently: if you need personalized advice, you should see a financial planner.
Make Short Term Sacrifices Now
“Given the size of your debt and savings, I would not recommend using your savings to pay off your credit card debt in full,” says Patricia Stallworth, Atlanta-based finance coach and host of the Minding Your Money 360 podcast. “This will severely reduce your savings and make you vulnerable in the event of an emergency.”
Instead, Stallworth suggests that you refrain from using a credit card until your debt is under control and a credit card payment in excess of the minimum is made. Ideally, you should also work a little harder to generate additional cash flow. This could include trying to take on extra work on the side or cutting your costs down by a few months.
“In this case, $ 200 a month will pay off this debt in less than a year,” she says. “You have the ability to pay off debt and keep your savings, and you can do it in a short time. But it may take some diligence and determination on your part. “
The 6.9% interest rate is fairly low (national average over 16% ), as is the $ 2,000 debt. With this in mind, Ilen Davis, a certified financial planner , takes a similar approach to Stallworth’s, albeit advocating a more aggressive attack on debt.
“I would recommend this client not buy anything that is not ‘vital’ until the debt is gone, and then pay $ 150 a week before spending the money on anything other than bills and essentials,” says Davis. “The debt will disappear in four months, and if this person is wise, he will then invest at least $ 100 of that $ 150 to start building wealth, with $ 50 a week to spend on more interesting things.”
Paying off your credit card debt will allow you to use your existing credit for possible future home emergencies.