One of the hardest challenges managing your financial life is figuring out how best to juggle multiple goals. And one of the most vexing decisions is what to do if you have credit card debt and you have money sitting in your emergency savings fund.
From a purely financial standpoint, it makes plenty of sense to pay off the credit card debt. The average interest rate these days is around 15%. Meanwhile, money you have in a savings account at a federally insured bank or credit union is likely not earning even 1%. So using the low-earning savings to pay off the high cost credit card debt is a smart financial move.
But you and I both know that money decisions are never purely financial. Emotions play a big role. And I am totally on board that for many of you, knowing you have money set aside in an emergency fund to handle life’s “what ifs” is what helps you sleep at night.
That said, if you have credit card debt, you need to make it your top priority to get it paid off ASAP. Here’s how:
- Look into transferring your credit card balance to a new card that charges no interest for at least a year. Some cards offer a zero rate for 21 months; that gives you a lot of time to pay off the debt while not owing interest. Search online for transfer deals that do not charge a fee on the amount of the transfer (some cards will charge you 3% of the amount you transfer) and that also do not charge an annual fee.
- You are not to charge a penny on this new card that you don’t intend to pay off in full each month. Read the fine print of your new card deal. While the amount you transfer gets the great zero interest rate, that’s not the case with any new charges you don’t pay off each month.
- Use an online credit card payback calculator to figure out how much you need to pay each month on your new card to have the balance paid off before the zero rate expires. That’s your new goal.
- I challenge you to scour your current monthly spending to come up with the money you will need each month to be on schedule to pay off the credit card debt during the zero-rate period. If you are truly serious about getting rid of the credit card debt you will find ways to scale back on your spending. Instead of looking for one big-ticket expense you can drastically cut or eliminate, consider this strategy: Look for at least a dozen monthly expenses that you can cut by at least 10%. Once you add up all those savings you may be very close to what you need to pay each month on the credit card balance.
- If you are still coming up short, I want you to consider dipping into your emergency fund each month to make up the difference. I realize that may make you somewhat uncomfortable, but I am not suggesting you empty out your savings in one big withdrawal. This way you will still have some money in savings, while you are working fast and furious to get rid of the credit card balance while the interest rate is at zero. Once you’ve got that polished off, use the money you were sending in each month to pay off the credit card bill to replenish your emergency savings fund. Trust me, the ultimate sense of security will come when you are free of credit card debt and you have an emergency savings fund.