When we or anyone else talks about budgeting, it’s with the main idea of making sure you can pay all your bills and, hopefully, have something extra so that you’re not always living check to check. This is all well and good, but it’s possible that maybe you’re not paying enough towards your bills or putting enough away for your future. And with those as your only two choices (spending every dollar you make is NOT a choice for now), which is better to deal with first?
Last year the federal government passed a law stating that your credit card vendors must supply you with not only bills 21 days before their due to be paid but estimates of how much you would need to pay monthly, without using your cards again, to get rid of that particular debt. For some people that number might seem impossible to deal with on a tight budget and they might decide to try to put some money away instead. Let’s look at some real numbers.
The first is interest rates. The overwhelming majority of credit card interest rates come in between 14% and 23%. At your best the rate you’ll earn on any type of investing or savings might be 10%, and that won’t be every year (if it is you might want to hire a consultant to see if you’re getting the Madoff runaround). If you have time, it’s probably better to put more money towards your debt, even if you can’t pay it off in 3 years, because it’s growing faster than you can grow your money.
However, what if you can’t stop spending or using your credit cards? Some people just can’t stop themselves and it’s understandable. There are wants and needs that come up, and sometimes the credit card just seems so handy. Even though it wouldn’t be recommended overall as a first choice, in this case it might be better if you can put some of your money away towards savings or investment because it might help to spur you to stop using your cards at some point and actually pay down your bills with the extra cash you might see.
The “might” is important to see because it depends on the type of savings or earnings you’re hoping to try. Traditional savings accounts don’t earn anything these days except maybe some peace of mind. CDs might pay 2-3%, while most mutual funds could, as the economy improves, grow by 5% in a year, which can be compounded if you add to the investment amount on some sort of monthly basis. Of course you have to know that there’s risk if you’re shooting for a 5% growth, so you could just as easily lose that much on your investment each month, even with adding money all the time. If you’re risk averse, paying down debt once again becomes the better option.
It’s always better not to get into overwhelming debt, but remember that every day is another opportunity to get a handle on it, and there’s always someone who can help you overcome it.