Are you in over your head in credit card debt? Do you feel like you can’t get ahead, but you also feel like you should be saving money? You aren’t alone. Everyday people ask the question whether they should save their money (pay themselves) or pay off their credit cards.
The answer is complicated. Technically, you should pay off your credit card debt first since the interest rate on your credit cards is probably much higher than any interest you could earn. But, if you don’t have an emergency fund or any money put aside, you could find yourself in over your head if an emergency occurred.
So what should you do? You’ll have to focus on both options.
Stock an Emergency Fund
At the very least, you should have an emergency fund with $1,000 in it. If you don’t have that, start putting money towards it right now. That will help you in a ‘small emergency.’ Eventually, you will want to get to the point that you have three to six months of income put aside. This way you know that you can manage emergencies that come your way.
Once you have at least $1,000 put aside, look at your 401K.
Saving in Your 401K
If you work for someone and they match any portion of your contributions to your 401K, it’s important that you don’t miss out on that opportunity. At the very least, contribute the amount that your employer would match. Otherwise, it’s like throwing free money out the window. So if your employer matches 3% of your salary, then you should contribute 3% of your salary to your 401K each year. This way you’ll double your retirement savings without blinking.
Pay off Your Debt
Once you’ve taken care of the bare minimums, it’s time to get rid of that credit card debt. It may be a good idea to try to consolidate it first. If you can consolidate it onto a 0% APR credit card, you’d be in even better shape.
Assuming you can’t consolidate your debt though, you’ll have to start working on the credit card with the lowest balance. This way you can pay it off quickly and see progress in your methods. If you choose the largest credit card, you won’t see progress very quickly and you could end up getting discouraged.
After you pay off the first credit card, take the amount you paid towards that credit card and add it to the minimum payment of the next credit card. This way you can start paying down the next credit card until you pay it off. You can keep doing down the line until your credit cards are paid off. The only exception to this rule is if you do end up with a 0% APR credit card. If that’s the case, pay what you can, but also put some of the money into your savings. Pay close attention to when that 0% APR expires though, since many of the credit cards only offer the 0% APR temporarily.
The ideal concept is to pay both yourself and your credit card debt, working to build up an emergency fund and get yourself out of debt. If you have to choose between one or the other, pay yourself if you don’t have any type of emergency fund then focus on your debt. If you are already set with an emergency fund, get that debt taken care of as quickly as you can.