Stop Saving Your Money!

[cicy33]

Re: Stop Saving Your Money!

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]

Re: Stop Saving Your Money!

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]

Re: Stop Saving Your Money!

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]

Re: Stop Saving Your Money!

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]

Re: Stop Saving Your Money!

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

[Aleta]

Re: Stop Saving Your Money!

When we were coming out of debt, we were advised to just save something, even if it was only $5. a month. There's a certain amount of psychology to getting yourself setup to save even if its a small amount. We were also told to allocate a small percentage for entertainment. Entertainment could be a video rental, Starbucks, whatever you think is entertainment. There are free concerts in Malls and parks. But, I do still believe that you should put the vast majority of your money towards debt. One other person said to start with 1% of your gross earnings for savings and work up there.

That is why I think the $20 challenge is so great. If you're doing all of the other things with your regular income, you could save up for your emergency fund with the challenge.

[LivingAlmostLarge]

Re: Stop Saving Your Money!

pay off card and put it back on when you need it is my vote.

[ren]

Re: Stop Saving Your Money!

I'm with Aleta -- there was a significant psychological element to having an EF when I was digging myself out of the hole (credit cards and car loan). Sure, I could have paid off the debt sooner if I hadn't had $1000 in the bank -- yes, I know that was an itty bitty baby EF, shush, it was a big EF for someone making what I made at the time.

There were two times when I ran into the need for more than I made in a given month while I was paying everything off; the first time (medical -- uninsured pneumonia) went on a credit card, the second (car -- replaced bald tires) came out of the EF I'd scrounged up since the first time. The second time was much easier on me, as I didn't have that helpless/hopeless feeling that I was still just digging myself in deeper and would never escape. Part of that may have been that I wasn't miserably sick and still working, part of it may have been the fact that balances were much lower the second time, but mostly it was nice not to see the last couple months of payments wiped out when the car needed new tires. I felt more in control of the situation, which actually led me to be even more disciplined about paying everything off, esp. once I moved to CA and got a better paying job and could do a lot more damage to the balances every month.

[PRICEPLUS]

Re: Stop Saving Your Money!

Always save something! It does wonders for the psyche!

[pepperbradford]

Re: Stop Saving Your Money!

I've always been in the "savings first camp"...until recently. We had a small EF, about $700, but it kept being whittled away at. We had credit card balances that we had been paying down for almost 10 years. Then I checked my credit and found it to be pretty good. So I applied for a new card with 0% interest on balance transfers (providian) and moved the balance off the other card (citibank, managed through CCCS at 9%). I paid it down and, as my 1 year started to run out, I applied for a new citibank card with the same offer. Then applied for a Kroger (grocery store) rewards card. Now we have about $1500 left in a balance on the citibank card at 0% unitl next Oct, and we use the Kroger card for everything and pay off the "statement balance" every month. I've been leaving the extra in the savings account to earn it's pitiful 2.2%. But perhaps there is a better use for the money.

Since I don't have any interest on my balance, it's not really a funciton of my 2.2% versus the 22% card interest. But I could be paying the card off quicker, and reaching my debt free goal sooner.

Also, and here's the reason I'm writing, I have two cards right now, as was mentioned. One has a balance with 0% interest, and is never used for purchases. The other is used for every purchase, and is paid off every month. I could use my dual credit card system as my EF.

Let's say I had a car repair bill of $1000. I don't have the money sitting around in savings anymore. But I can't afford to carry that balance at 23%. so I put it on my Kroger card initially (and earn my $10 in rewards), then immediately transfer the balance to my Citibank card, where it will sit with 0% interest until I can pay it off. Doing this will cost me $30 in a balance transfer fee. Minus the $10 I earned in rewards, it costs me $20, or 2% amoratized over the 10 months left until my 0% offer expires in Oct. At which time, I expect to apply for another 0% card offer...

[Aleta]

Re: Stop Saving Your Money!

I totally agree with you. Although you only had $700 in your EF, wasn't it great that you already saw that with an adequate savings in the future that you would be a little more self-sufficient. I think those o% cards are great if you have the discipline to use them and not to get into debt again. The majority of people don't have that kind of discipline.

I just think that it's a good idea that you set yourself up to think about the future and also a little fun on the side so that you won't be totally frustrated with the process. Yes, those times will come, that the little or big emergencies will pop up and what do you normally do but to put it on the card. I just think that it's just reeducating yourself about and allocating and saving for those times.

[laceshawl]

Re: Stop Saving Your Money!

I have seen people pay off all their credit cards (maybe they inherited money and used that or worked overtime). Then within a year they had run their cards back up again. I think that it is important to establish the habit of saving even if it is only $5 a week rather than wait until they are paid off. Personally I always kept $500 in the bank while paying off debt as I would get very discouraged if I had to run the cards back up again for an emergency. I think you have to understand your own personality and know what works for you.

[Bookie]

Re: Stop Saving Your Money!

The challenge isn't so much to pay off the credit cards as it is to live without abusing credit. Like Laceshawl I've watched people manage to clear their cc accounts after heroic struggle, only to slide back into debt.

Learning to live below one's income is the trick that seems to elude so many. It all comes back to money management, and that's the theme of this site. How one gets there is less important than the lessons learned and applied along the way. The elimination of cc card debt is a means and not an end.

[Ima saver]

Re: Stop Saving Your Money!

I transferred the credit cards around to keep getting the 0% so I paid no interest, but I kept using the cards. Finally a few years ago, I decided to pay off the cards and only charge what I could pay for each month. I have managed to do that for several years now. I have always had a saving account and I would not feel comfortable without one. Fortunately, I do earn 5.25% interest. I have a girlfriend who had no savings. I asked her if she could just save $5 each week. She said, yes, but what good would that do? That was 30 years ago, I wonder how much money she would have now?

[The Budget Man]

Re: Stop Saving Your Money!

Many of the "emergencies" that make a mess of our lifestyle are actually bills that we haven't made allowance for.

It makes sense to have a budget that automatically predicts what is coming up in the future and year by year becomes even more accurate.

After all, the main purpose of a budget is to be sure you are happy both now and in the medium and long term.

Enjoy Your Money

https://www.PersonalityBudgeting.com

The easiest way to let your budget be calculated for you.