So the new year has started, and you want to get your finances together. A question I get often is, should I build some savings first, or pay off my credit cards first.
The straightforward answer is this: it makes by far the most economic sense to pay off your credit cards first. After all, the BEST savings accounts these days are paying maybe 1% interest. On the other hand, the best credit cards are charging 7% interest! So for every $1 in interest you would gain in savings, you’re losing 6 more to your credit card company.
That said, getting your finances together is partly common sense, but large psychological. It may make psychological sense to get in the habit of having some savings. Many people with credit debt and no savings think of their credit card as a type of savings account. The car breaks? No problem, I have some room on the credit card. Getting out of this habit is key to getting out of debt. One way to do this, is start building your savings now, while ALSO paying down your credit cards.
Start with a small amount. Just socking $20 a month away can build up a savings account faster then it would seem. Even though you won’t be paying down your debt as quickly as possible, you’ll now have an emergency fund, and not adding new debt means you’ll continue to see your balance fall on the credit card, which will make it easier to stick with your debt plan.
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