Many people struggle with the question of whether to pay off their credit cards or save money. There isn't one answer that will apply to every person; however, you can make a more sound financial decision when you consider the pros and cons of doing one or the other. Despite the conventional wisdom that paying off high interest credit cards is better than saving, you need to decide what your best option will be based on your needs, priorities and financial goals. Also, consider setting up a small emergency fund while you pay down debt so you avoid replacing old debt with new debt.
Pay Off High Interest Rate Credit Cards
While some people might be more secure with a high balance in their savings account, such numbers can be deceptive if they carry an equally high balance on their credit accounts. Savings accounts generally have lower interest rates when compared to the higher interest rates that credit cards tend to carry. In the long run, you lose money by saving when you could be paying down high credit balances.
Pay off Credit Cards if You Already Have an Emergency Fund
If you already have some money set aside for an emergency then paying off your credit cards is a good idea. Without having money set aside, you may find yourself stuck and reliant on your credit when an emergency comes around, putting you in an even bigger financial hole than you started with initially. In today's economy, having an emergency fund is especially important since various forms of credit, such as home equity lines of credit, are not as available as they once were.
Save Money if Your Family or Job Situation Might be Changing Soon
Consider saving some money to take care of anticipated expenses or changes to your life situation. If you are working in a volatile industry and are susceptible to layoffs, then building your savings might give you a little buffer. Similarly, if you are expecting a child, having some money handy will allow you to afford some of your expenses without resorting to using your credit and having to pay interest on whatever you charge.
Save Money if Your Company Offers a Matching Contribution
Saving money might be a good idea if your company offers a matching contribution. In that case, it may be unwise not to take the money and use it to your advantage as you work toward a more secure financial future.
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