Stop Saving Your Money!

[jeffrey]

The title of this article probably caught you a little by surprise. The first thing to make clear is that the article's title is not a typo. That being said, you are probably wondering why an author dedicated to helping people with their personal finances is writing an article that plainly states not to save money. The answer is quite simple: there is a much better way to be utilizing your money than putting it into your savings account.

Before we get into the heart of this article, let's take a minute to look at money from a different perspective. Most people assume that if they have an account with money in it, then they have "savings." On the surface this may seem logical, but if you take a deeper look into the reality of most people's financial situation, it simply isn't true. What they have is not savings, but an easily accessed pool of money in case of an emergency.

Most people see the two as the same thing. This article will show you that they are not. Savings is a pool of money that you have above and beyond all current debts that you owe. While most people have a pool of money that is easily accessible in the event of an emergency, this money is rarely money above and beyond their current debts (if it is in your case, you can disregard the article title and save to your heart's content). While this concept may seem like trivial semantics, understanding the difference will go a long way in helping you truly save money for your future. Let's look at an example that will help to illustrate the point.

I assume that most of you have a savings account of some type. If you are lucky with the current economic conditions, it is earning a few percentage points in interest each year. Let say, purely for example's sake, that you have $5000 earning 2%. On the surface you would assume that your money is gaining 2% a year. Unfortunately, you also have to take the inflation rate (the increase in cost of the same items year to year) into consideration. In this example, the current inflation rate wipes out the interest you are earning meaning that you are breaking even each year. While breaking even is better than losing money (the situation if you kept your money someplace that isn't earning any interest), we still need to take into account some other issues that most likely apply to you.




Chances are you have some credit card debt. Let's say, again purely as an example, that you're paying 18% interest on a $5000 outstanding balance on your credit card. While the money in your savings account is earning 2% (which is actually 0% when inflation is factored in), you are at the same time paying out 18% to the credit card company for the same amount. Taking this into account means that your $5000 in "savings" is actually losing 16% a year (or 18% with inflation factored in). While this is definitely not a rosy picture when you thought your were saving money all this time, it gets even worse. You are required to pay taxes on the 2% interest you earn in your savings account while you are paying the credit card interest rate with after tax dollars.

When you look at your savings from this reality, the first thing that should be obvious is that it makes no sense to "save" and thus the title of this article. Don't save money! Instead, take any extra money you have and start paying down your outstanding credit card (or if you don't have credit card debt, any other) debts with it. By taking this approach, you will be getting an 18% guaranteed return (or whatever your current credit card interest rate is) on your money instead of losing 16+%. Better yet, you will save yourself hundreds, if not thousands, of dollars in interest charges and you will move toward the point when you really can save money for your future.

[bookchiq]

I absolutely agree with the gist of your post. The thing I'm wondering about is what happens when an emergency does come? Do you recommend still setting aside a certain amount of money in case of unexpected financial hardship (losing a job, car breaking down, that kind of thing)? Or is it better to charge those expenses on a now-payed-down credit card and reap the financial benefits in the meantime?

[jeffrey]

Many people have differing opinions on this and ultimately you need to choose what you feel most comfortable with. Personally, I would place 100% of any savings against the credit card debt and if an emergency did arise, I would place it on the paid down portion of the credit card. Now, that works for me because I hate credit card debt and know I would pay it off asap.

[cicy33]

I guess my confusion is if you have no savings cuz you are concentrating on a card, and then you have a problem and you put it on the card aren't you sorta like chasing your tail??? I think that it would be better to save a little into savings, just enough to take care of a real emergency, don't touch it and then concetrate on the cards. That way you don't max the card again.

[jeffrey]

Originally Posted by cicy33

I guess my confusion is if you have no savings cuz you are concentrating on a card, and then you have a problem and you put it on the card aren't you sorta like chasing your tail??? I think that it would be better to save a little into savings, just enough to take care of a real emergency, don't touch it and then concetrate on the cards. That way you don't max the card again.

The hope is that you don't have an emergency where you have to put it on the card, but we all know how emergencies don't like to follow our well laid plans. This is the way I look at it:

Say you have $1000 in your emergency savings account and you have $5000 in credit card debt. You know you are probably going to need to use that $1000, but not sure exactly when. Until you need to use it, you can leave it in your savings account and earn 3% or put it against your credit card and not pay 18% (or whatever your credit card rate is)

Now if an emergency does come along and you need to place it on your credit card, then you should pay it back to the credit card asap (just as you would replenish your emergency savings account if you had to dip into it).

[cicy33]

I still have to think that it would be good to go ahead and put $1000 into a savings account and then focus on the debt. Knowing my life, I would have an emergency at some point. I have found that driving an older car tends to require work from time to time! still cheaper than a new one though. Of course I don't have that much in savings! But I am working on it. This board is very helpful. I am learning so much and it helps to see others in the same situation.

[karnic3881]

cicy33, I agree, because I am going through it now that I regret being so aggressive towards my debt and not putting as much into savings. I think putting a certain amount in, whether a grand, 2 grand, etc. will make you feel better and provide a cushion. I am working to do so now, and hopefully it will not be a problem in regards to the time I have.

My situation: I am down to 3 debts (not including car loans). Dell Computer, Best Buy, and Discover Card. The Discover only has a limit of $1200 and cash advance of $300 or so. It is all but maxed out right now. My SO works for the apartment complex we live in, rent and utility free (this allows me to be as aggressive as I have been in paying off debt), but may lose his job (he has medical issues and has been out of work), causing us to move. Here in NJ, we'll need at least $2500-3000 to move - security, 1.5 month's rent, etc., not to mention moving expenses. Do leasing offices accept credit cards? Not sure, but even if they do, I still need more cash on hand then is my limit, and what if we find a great deal from a private party to rent? They don't take credit cards. So in almost all situations, the paying off of debt would be my first recommendation, but I think you need to just take a look at your personal situation and determine what is best.

[cicy33]

I am personally just a beginner at this saving thing. Even though I am almost 40 (boy is that hard to see in writing!) I have little savings, a small simple ira program. but I am seeing some areas that I can work on and that is what is helping. I think that I am going to try to do both. put a little extra to debt but also try to put some into a savings account just in case. Then after so much is in savings I can focus solely on the debt.

[terry1156]

I understand wanting to have savings even with credit card debt because I have been there before. The thing to remember is that the savings are false savings. The savings can make it even harder to get out of debt. At least that was the situation in my case.

What happened was that we decided that we always wanted at least $2000 in our savings account. But everytime we got it to $2000, something would come up and we would have to dip into the emergency fund. We never wiped it out completely, but because we were always focused on building the emergency fund, we never began to pay down the credit card debt.

After several years of this, we decided to place all our savings against our credit card debt. After doing so, it was the first time that we started to really make a dent in our credit card debt. This is what happened. Everything was fine for the first 6 months and then we had a car repair bill that cost us $1000 which we had to put on the credit card because we had no savings. Then at 9 months we had another emergency that took another $500 from the account.

At the end of the year, we had replaced all the money we had taken out for the emergencies. Had we kept all the money in our savings account, we'd still would have had $2000 in savings, but our credit card debt would have been the same. Since we had placed the money against the debt, even though we had to charge money to the credit card during the emergencies, we found at the end of the year we had $2200 worth of room on the credit card. by paying off the credit card insted of putting it in savings, we had managed to erase $200 of the debt.

[PrincessPerky]

I have 1000 in my checking that I ignore, cause if not there I would prolly overdraw it all the time, like I used to when the money was in the savings account (earning a lot less than 3%) now if I were careful I could do without, but I know me better than that! So I am saving on the fees for getting the loot out of the savings that I used to pay. And it is there in an emergency, but like I said I ignore it, so I plan on putting DHs dental work on the CC unless he can scrape enough overtime between now and then.

[Bluezy]

Princess:

I think that is a good idea to place a certain amount as a cushion to your check account. Although you would not be earning 3% plus on your cushion. You save on fees and do not have the cushion tied up to an interest bearing account. A girl can not be too careful.

[Haku]

I realize I'm responding quite late to this conversation, but I feel strongly compelled to do so.

When I first started my journey to climb back out of debt, I decided to pay everything I can to the credit card with the lowest outstanding principal. Then, I kept it, holding it as an emergency fund while I "snowballed" the rest.

This worked out well enough for me, but some feel that it is better to set up a tiny emergency fund first, if nothing else so that it can alleviate the sense of hopelessness and motivate the owner to keep going. I can appreciate the rationale, but didn't take this approach. Having had heated debates about this, I'm glad to see I'm not the only one who thinks this way.

Today, I have no credit card debts and refuse to have anymore. Instead, I have an emergency fund sitting in a money market account that is tied into my checking as overdraft protection.

[lukkyb22]

I am sure everyone knows this, but if you are carrying a balance on a credit card, you need to have 2 cards. one is paid off every month and you accrue no finance charges. the other is not used, but you will be paying interest plus whatever else you pay down. if you have a balance, anythign you charge immediately begins getting slapped with interest, whereas if you don't have a balance you are free and clear--until the bill comes!

[cicy33]

Originally Posted by lukkyb22

I am sure everyone knows this, but if you are carrying a balance on a credit card, you need to have 2 cards. one is paid off every month and you accrue no finance charges. the other is not used, but you will be paying interest plus whatever else you pay down. if you have a balance, anythign you charge immediately begins getting slapped with interest, whereas if you don't have a balance you are free and clear--until the bill comes!

I am a little confused by this paragraph. Why would you be paying interest if you don't use the second card and you pay the first card every month? Could be I am sleep deprived!
On the other subject. In my situation I don't have a current credit cards (except sams card) so, I have to have a small emergency fund set up or I have nothing to fall back on. The only it works to use the card as an emergency fall back is if you have one!

[lukkyb22]

you pay interest if you carry a balance, regardless of whether you use it or not.

[cicy33]

Originally Posted by lukkyb22

you pay interest if you carry a balance, regardless of whether you use it or not.

I see what you mean, you are talking about one that already has something on it. sorry, told you I was sleep deprived!

[Mathew Green]

Originally Posted by jeffrey

Chances are you have some credit card debt. Let's say, again purely as an example, that you're paying 18% interest on a $5000 outstanding balance on your credit card. While the money in your savings account is earning 2% (which is actually 0% when inflation is factored in), you are at the same time paying out 18% to the credit card company for the same amount. Taking this into account means that your $5000 in "savings" is actually losing 16% a year (or 18% with inflation factored in). While this is definitely not a rosy picture when you thought your were saving money all this time, it gets even worse. You are required to pay taxes on the 2% interest you earn in your savings account while you are paying the credit card interest rate with after tax dollars.

When you look at your savings from this reality, the first thing that should be obvious is that it makes no sense to "save" and thus the title of this article. Don't save money! Instead, take any extra money you have and start paying down your outstanding credit card (or if you don't have credit card debt, any other) debts with it. By taking this approach, you will be getting an 18% guaranteed return (or whatever your current credit card interest rate is) on your money instead of losing 16+%. Better yet, you will save yourself hundreds, if not thousands, of dollars in interest charges and you will move toward the point when you really can save money for your future.

Jeffrey, I used to feel the same way about this issue and mostly for the reasons you noted. I still believe those factors have to be carefully weighed in deciding how much, if anything, to keep in a savings account. We also need to weigh what other sources of readily available cash we have. For example, if worst came to worse, a person with a ROTH could draw out some of their contributions tax-free and without penalty to meet short-term needs.

But on the whole, I am a big believer in having an emergency fund for three simple reasons:

1) There are some things you can't put on a credit card: Mortgage payments and CC payments being two of the biggest. So while many people can now pay utility bills and almost anything else with their CC, we still need cash to pay the CC bill itself if our income stops for any reason.

2) A CC is not an emergency fund. It can be used to pay for almost anything you have to buy, but getting cash from a credit card not only costs you a 'cash advance fee' but also usually carries a higher interest rate that will stay in effect untill all of your lower-interest purchases on that card have been paid off. So, in any situation where you need cash, a savings account or something similar is king.

3) People tend to underestimate their chances of being laid off and the amount of money they would need if it happened. Do you work for a big prosperous company with no danger of layoffs? Enron! Do you feel confident you can survive on an unemployment check? It takes 2-4 weeks before your first unemployment check arrives (depending on where you live) so how will you pay your bills in the meantime?

I'm the first to admit that keeping a full month of income in a savings account while you still have debt is costly and inefficient, but it is also a very good idea. Like auto insurance and house insurance that we hope we'll never use, an E-Fund is an 'insurance policy' that's worth paying for because the unthinkable really does happen.

[cicy33]

I wholly agree with above. I also understand the necessity of paying off debt. but if you don't have something saved then you are in huge trouble when you need to pay something that cannot be paid with a credit card.

[reviewer]

Some tips that I've learned:

1.) If you have credit card debt, but the cards are still usable for emergencies, ALWAYS PAY THE CREDIT CARD FIRST before putting money in savings. This way, you're only paying the high interest rates if there's an emergency, rather than paying them just in case you have one! Of course, if you can get a zero-percent interest rate for 6 months, or what have you, this might be a good temporary spot to keep your debt.

2.) I am not a "big spender" and don't have trouble controlling myself, but I do have trouble with remembering how much is in checking/savings at a time. I have some high-limit rewards cards (cash back) that I put all of my expenses that I can on, and then pay off the new balance each month online. (Always pay the "new balance" not the "full balance" if you're online - this way you're not paying sooner than you have to.) This means a little more cash sitting around in your accounts - which was VERY handy when a company accidentally charged me twice for a large payment! Kept me from any overdraft fees. I also earn a lot of rewards - it's amazing what you can put on a credit card (everything except rent, in my case - including all utilities and medical bills). Of course make sure you're not paying any "convenience" charges to pay on the card.

3.) Once the cards are paid off to the point you're always paying the whole new balance, then start putting money in savings. Online savings is MUCH better - better interest rates, lower fees, more freedom. I use ING Direct, and you can have any amount of money (I've had as little as under a dollar in the account, when I needed it for a large down payment, and as much as several thousand). Compare ING's current rates to your local bank, who will offer you maybe a half percent if you don't want to maintain a minimum balance.

4.) If you absolutely must carry a balance, try to keep it on your lowest card. Avoid paying any balance transfer fees, though. Just pay more on that card, if you have to.

5.) Keep track of your due dates! Late fees hurt twice - both the fee itself and the credit ding. I like to set up payments in advance to come out of my checking account on payday, just so I don't forget, and my cards fortunately all have due dates after one or another payday in the month so it works well.

One last tip - a lot of the better card services will offer tools to manage your accounts better. You can, for example, with a Target Visa, break down all of your spending into categories so you can see how much you're spending over a month or a year on various things. Pretty cool!

[The Budget Man]

The exciting benefit of paying off your Credit Card before you try to save up for "emergencies" is that once you are no longer paying off the Credit Card you can easily save for the "Emergency Fund".

If you do it the other way around (try paying off the Credit Card and saving an emergency fund together) you have the difficulty of paying off the debt and saving at the same time. In this situation "emergencies" happen more often.

There's a bonus. When the Credit Card is paid off you have a new project to move to immediately. (saving an emergency fund.) Human nature being as it is, if you dn't have project in place the money will disssapear and won't be saved.

Enjoy Your Money
The Budget Man

Setting up your budget to suit you is not just simple it's also fast.
www.PersonalityBudgeting.com