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The old question... to save or pay off debt
Old 04-01-2011, 08:36 AM   #1
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The old question... to save or pay off debt

I know this is a question often asked. I am in the military right now and just finished about 5.5 months of temporary duty where I collected a significant amount of per diem. I lived well below my means during this time as to not spend any of it. I will have a check coming to me sometime next week of approx. $4,500 of extra pay from this. Problem is that I have about the equivalent in cc debt from my college days. I know the smart thing to do would be to pay off the cc since the interest rate is higher than the savings rate. However, I am having a hard time having a large sum of extra money like that come to me and not seeing it help grow my savings account.

My intentions have been to just pay off the cc, but lately I have been thinking of splitting it and savings half and paying half the card off. Is this just a stupid idea? Again, I realize long term I will end up "losing" money because of the difference in interest rates but something about me makes me feel better having some extra savings.

Thoughts?
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Old 04-01-2011, 09:05 AM   #2
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Numbers?

Kinda depends what the cc interest is and what you think you can make safely. In the distant past we paid down our debt hard as it was the most brain-dead simple way to get a guaranteed effective return on our money.
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Old 04-01-2011, 09:15 AM   #3
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Pay off the debt. Very, very doubful you'll get anywhere near savings interest vs CC interest.
If you need some cash pay 80-90% of the CC off, leave only as much on it as you can pay off in the next billing cycle or two, but get it gone.
Don't add any to it either or you'll be repeating this over and over.
Painful as it is, having no debt is not only good for saving long term, it's good for stress levels.
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Old 04-01-2011, 09:16 AM   #4
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To second Calmloki, I think it depends on your interest rate on the credit card. Also, do you have any money put away for emergencies? I know a general rule of thumb is to set aside 3-6 months worth of expenses, and Suze Orman takes it a bit further, to 8 months.

If you don't have anything in emergency funds, maybe consider splitting it down the middle...put half into savings, and half towards paying down the credit card bill?
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Old 04-01-2011, 09:32 AM   #5
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Pay off the debt. Not only is it the best move from a numbers perspective (you're not going to find a guaranteed "rate of return" that will match your credit card interest rate) but it also rewards you with much less stress and worry.

Not only does it feel good to get that debt off your back, you will be in a better position to start building savings now with a clean slate.
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Old 04-01-2011, 09:41 AM   #6
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Pay off the debt. CC debt is some of the worst you can carry. Having money in the bank is also a nice feeling but to me having no debt is a better one. You might try setting up an automatic savings plan using the same amount you would have paid to the CC company. You might be surprised how fast it adds up.
BTW thank you for being in the military.
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Old 04-01-2011, 11:42 AM   #7
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Pay off the debt. No one, I hope, takes a CC cash advance to start a savings account.
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Old 04-01-2011, 11:54 AM   #8
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If you were debt-free, but flat-broke, would you take a $4,500 cash advance on your credit card in order to feel like you had some "savings?"

It's the same question, just phrased a different way.
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Old 04-01-2011, 01:43 PM   #9
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Copy. Sounds like I will be paying of the cc. I never thought of it as taking a cc advance but I guess it is essentially the same.

Thanks for your support vince!
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