The Reasoning Behind Holding Onto Our Savings

Marg asked a great question in the comments:

I have a friend who is in a similar situation (has enough savings to pay off credit card debt but opts not to based on fear of emergency). Can you explain the reasoning to me? … If an emergency arises, why couldn’t you use a credit card?

For our situation, the mathematical thing to do is to leave our savings alone. Our debt is at 0% and will be for a little while yet. So we are earning money on our savings (although the average interest rate is well below 2% right now). If we were paying interest on our credit card balance, we probably would have used our savings to pay off the last of it. We’ve paid enough in finance charges through the years and I don’t want to pay a penny more if it can be avoided.

There are emotional reasons as well. I like having money in our savings account that is ours…all ours. We use it and we don’t owe anything to use it. There is something I find very empowering about that. The other day I started thinking about how much we should aim to save up for a good emergency fund. $10,000 popped in my mind and I realized how many emergencies that could cover. That would be an awesome safety-net.

Then there is another emotional reason. I have concerns about the transition phase we will have to go through once our credit card debt is paid off. We’ll still have student loans and a mortgage, but we are going to spend some money on things we have been putting off while in debt reduction mode. There is always the concern that our old habits could resurface. Going into this transition, I think I would rather have some money in the bank in case we stumble a little bit.

Back when we started our debt reduction journey, I was anti-emergency fund. If we had an emergency, we would use our credit cards. Gradually we started up a little account then added more and more to it. It became a “financial blankie” of sorts. The economy may be going a little crazy but we have some cash in the bank. It’s comforting.

I did take a look at our finances today. This weekend my husband and I will discuss and decide what we would like to do. We will be able to pay a chunk of our debt off, but we will have to pull some money from our savings to finish off the rest. We’ll take a look at the pros and cons to figure out what is the best route for our family.

Posted by Tricia on April 3, 2009 at 12:27 AM in General Debt | 12 Comments »
You can skip to the end and leave a response. Pinging is not allowed.

Newer Posts Older Posts

Baker @ ManVsDebt responded:
Posted: April 3rd, 2009 at 5:53 am
Don’t forget that a lot of credit card company are changing terms, canceling cards, and lowering limits.

There’s nothing like having that money in the bank, when a real emergency does hit. In addition, not every emergency can be solved by a credit card in the first place.

While it is hard to do, especially with high interest debt, it’s important to stick it out and hold onto the security!
Jan responded:
Posted: April 3rd, 2009 at 6:29 am
This issue was addressed by Suze Orman on Oprah just yesterday. Her advice used to be to pay off debt no matter what. Yesterday she told two women to bank their severance pay rather than put it toward credit card debt. The reasoning was that credit card companies are closing accounts right and left. If they pay it off the cards will probably be shut down. Then they will have neither cash nor credit in an emergency.
Another Reader responded:
Posted: April 3rd, 2009 at 7:41 am
I understand you want to take a break from debt repayment to spend, but I’m having trouble understanding why you think of the student loans as a different class of debt. Student loans are really no different than any other form of consumer debt, even though they were acquired for education and are considered by some to be “good” debt.

Student loans are one of the worst forms of debt to have. You can bankrupt out of other unsecured debt, but you cannot bankrupt out of student loans. If your income were to take a big hit and you could not pay the loan payments, interest and fees would accumulate quickly, significantly increasing your debt burden and ruining your credit.

In your shoes, I would come up with a plan that focuses primarily on repaying these loans as soon as possible. I would plan a small but meaningful reward for the family at the end of the credit card piece, but then return to disciplined loan repayment, with a portion of the former credit card payment diverted into the savings account.

If the business income continues to increase and you both keep your existing jobs, you should be able to make some significant progress on both fronts. By building your savings at the same time, you will be able to deal with a major issue, such as replacing your car.
Jen responded:
Posted: April 3rd, 2009 at 10:00 am
I think people consider student debt to be different than credit card debt because of the interest rate difference.
Kev responded:
Posted: April 3rd, 2009 at 10:49 am
@AnotherReader:

I see what you’re saying, but I have to disagree. You’re right in that Debt is Debt and that it is all bad, but I personally feel that Student Loans are the lesser of the Evils for the following reasons:

1.) The interest rates on Student Loans are usually somewhat tolerable (mine are locked in at 2.5%). Even with the way things are now, you can still consolidate student loans at around 6%.

2.) Taxes! – You can deduct the interest you pay on Student Loans.

3.) When life gets rough you can tell them to leave you alone for awhile. This is a huge one. I don’t worry about my Student Loans b/c I know I can always place them in forbearance in the event of a job loss or other hardship. I wish I had that same peace of mind when it came to my Mortgage and Car Payment…

Student Loan debt is the LEAST of my worries. Someday I will attack it in the same manner that I did my credit cards, but not before I have everything else paid off and a fully funded EF.
Jen responded:
Posted: April 3rd, 2009 at 12:27 pm
I agree that debt is debt, and school loan debt can be just as bad as any other debt. But the low interest rate I locked in really affects how I feel about paying it off right away. It’s such a low interest rate, and I’d rather have the emergency funds. I pay extra towards it, but I can’t bring myself to take a huge chunk out of savings to get rid of it. It’s a tax write off too. Maybe if I hit a certain amount in savings, then anything above I’d use to pay down the school debt? That would make more sense.

I understand the dilemna described here regarding the credit card debt/emergency funds. I think if your cc debt is still at 0%, just keep doing what you are doing. Better to have the savings.

I think you will find that it will feel very satisfying to put what you are now paying towards debt into a savings account. Or pay extra on the mortgage or school loan. Sure, you might splurge a bit, but the savings adding up faster will curb the cravings to save …
Jay Gatsby responded:
Posted: April 3rd, 2009 at 2:45 pm
I don’t agree about paying off student loans immediately after paying off credit cards. Keep paying the loans as usual, but don’t pay them off early. Inflation is eating away at them, and you’re probably enjoying a nice tax write off for the accruing interest. Treat student loans no different than your mortgage. Both are debts, but they are “good” debts provided you can service them in the ordinary course.
Brian responded:
Posted: April 3rd, 2009 at 2:58 pm
The hard part is knowing when to stop. I’m currently building a safety net and funding retirement accounts and not pre-paying my school loans or mortgage. With the economy the way it is, I want the security of having cash on hand. I’m almost to the $10,000 mark, but then I do the math and figure that’s only 3 1/2 months of expenses when people are going unemployed for eight, nine or ten months at a time.

Still, I think it’s best to call it quits at that point and start paying on something else. Otherwise I may be saving forever without ever eliminating the debt.
Tricia responded:
Posted: April 3rd, 2009 at 5:32 pm
Another Reader – Kev pretty much nailed why I don’t classify student loan debt as credit card debt. Don’t get me wrong – having no debt is the ideal situation. But our student loans have the financial hardship clause. We’ve worked with our loan holder before with that. Our loans also are forgiven upon death.

Brian – I agree about how hard it is to know when to stop. I’d like a million in the bank but then we’d never get anything paid off
Ken responded:
Posted: April 4th, 2009 at 7:14 am
There is no easy answer to this issue. You have to do whatis right for you. I recommend paying half of cc debt off and keeping the rest in EF. While the interest rate may be 0% right now CC companies can also raise interest rates without any notice….good luck on your decision.
Donna responded:
Posted: April 4th, 2009 at 10:27 am
Tricia, Have you seen this article yet on how Susie Orman is now saying an Emergency Fund is more important than debt repayment due to the fear of losing one’s job?

http://biz.yahoo.com/usnews/090403/03_suze_orman_and_the_new_rules_of_credit_card_debt.html?.&.pf=banking-budgeting
Kate responded:
Posted: April 5th, 2009 at 7:26 pm
I was going to comment about Suze Orman’s appearance on Oprah the other day, talking about this topic, but Jan covered it for me.

I read Suze Orman’s 2009 Action Plan at the beginning of this year, and I have to applaud her for changing her financial advice to fit the times. So often we ask “financial advisors” for advice and are led astray, but I really believe Suze has our best interests at heart. Therefore, I listen to her