Contributed by Patricia M.

Q: I found I have some extra

money after redoing my budget. Should I put it towards savings, my retirement plan or credit card debt?  – Katie K.


A: Put it into savings.

There are so many different opinions on this subject. Some say you should put the money towards your debt, after all you are paying high interest rates and that all adds up.  Others say you should put it towards your retirement plan as you build compound interest.  Both of these arguments are pretty good and make a lot of sense.  But they do not address the actual problem – the reliance on credit cards in ‘emergencies.’

Katie has been using credit cards as a crutch.  She doesn’t have any money in her savings so when emergencies happen, such as car repair or vet visits, she pulls out her credit card.  Each time she is sure she will pay off the new amount on her card, but then some other emergency comes up.  Emergency after emergency arises. Her hope that she will be able to get out of debt diminishes and she winds up using her credit card for non-emergencies as a form of retail therapy.  This makes her feel worse and the cycle continues.

The advice I have is simple in theory but hard to practice as it involves changing a pattern.

  1. The first thing Katie should do is take the first bit of extra money that comes in and open a savings account.
  2. Then she should take her debit card and ask for an ATM card at the bank, one without a MasterCard or Visa logo on it.
  3. Next she should take her debit card and all her credit cards and put them in some plastic cups, fill them with water and place them in the freezer.  If she wants to use them she will have to wait for the ice to melt, which can take up to 24 hours, as you don’t want to put your credit cards in the microwave or on the stove top to melt the ice.

Now when she has an emergency, she will need to reach into her savings or think resourcefully for another solution.  Instead of using the debit card, which make the memory of most purchases disappear, she will use the ATM card and take out what she needs for the week in cash.  Put the whole amount in her wallet or divide it by days of the week and only put that amount in her wallet each day.  Seeing the actual money and how much you have left makes you rethink buying that $3 lemonade with your lunch.

Now say two months go by and Katie has an emergency and her car breaks down again.  She can go into her savings to pay for it.  Even though her savings have now dwindled, she didn’t add any money to her credit card debt.  She can add money back into the savings account.

Eventually these new behaviors will have Katie spending her money more wisely and her savings will grow.  Once she has a nice cushion she can then choose between putting the extra money into retirement savings, my first choice, and then credit card bills.

Credit card debt can seem crippling but it is the behaviors and habits you have that put you in that place.  Break those and then you’ll be able to get rid of your debt.

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