Should I use my savings to pay off my credit card? I have just enough in the bank to cover the debt. What do you think I should do?
Your question is a variation on a theme we've heard before. The basic idea you're wrestling with can assume a number of slightly different forms; for example, "Should I pay off my credit cards first or put some money in savings?" or "Should I start saving or giving?" When we get these kinds of inquiries, we usually answer – somewhat tongue-in-cheek – "Yes, of course." That's because, from our perspective, wise financial management is never an "either-or" proposition. It's a question of maintaining balance.
Financial success depends upon good stewardship. And good stewardship, as we see it, is founded upon four foundational planning principles: spend less than you earn, avoiddebt, set long-term goals, and maintain liquidity. Your question sets two of these principles – avoid debt and maintain liquidity – in competition with each other. That's highly inadvisable, since both are essential to your financial well-being.
Eliminating credit card debt is the surest and highest form of investment return you can make. Not having to pay that interest cost each month is, in effect, the same as achieving the same rate of return on any monies you invest. That's why freedom from debt is such an important financial goal. At the same time, liquidity – which you can think of as available savings, bank accounts, and other holdings that can be converted to cash quickly – is indispensable in a world where the future is uncertain. An emergency savings fund can spell the difference between bankruptcy and financial survival if an unforeseen disaster arises. That's not to mention that our society is structured so that the less money you have, the more things cost, and the more money you have (liquidity, that is), the less things cost. So it pays to have a reserve of ready cash on hand.
What should you do, then? Pay off your debt or maintain your emergency fund? We'd suggest that there's no reason why you can't work in both directions at the same time. Devise a plan by which you can put some money toward debt payments each month while still earmarking some for your savings account. Make this plan a part of your budget. You may not be able to do everything at once, but you can certainly do a little at a time – a few dollars here, a few dollars there. Daunting as it seems, you simply have to discipline yourself to start small and build gradually. However you arrange it, we think it's wise to keep a hand on both priorities simultaneously.
For additional help and information on this topic, we'd encourage you to consult the resources and referrals highlighted below. Or if you have relationship concerns and challenges associated with this situation, please don't hesitate to give our Counseling department a call.
Is It Wise to Pay Off Credit Cards?: Ron Blue offers his perspective on the benefits of paying off credit cards.
Money and Finances