Pay of Credit Card or Start Cash Reserves?

Often we see either young folks just starting out or people who are recovering from tough times who struggle with what to focus on first. Pay off credit card debt or start a cash reserve? There are many opinions out there as to which should be the priority. Many say to pay off credit cards first since they likely have 10-15%+ interest rates and your savings account would be lucky to earn 1%. I don't necessarily agree with this.

The problem with this strategy is that someone in a tough situation needs to stop worrying about the “interest rate game” and worry more about what got them into their current predicament. Without a proper cash reserve there is nowhere to turn when emergencies come up. The only option many times is credit. It’s an awful cycle that can only be remedied by starting a cash reserve. Does it take longer to pay off your credit card? Yes. But, at least the balances will be decreasing and when the inevitable occurs there is somewhere to turn rather that won't increase your debt.

By starting the cash reserve BEFORE focusing on paying extra on your credit cards you give yourself flexibility and it will feel good to actually have an emergency account. To help getting your savings started, consider the Two Checking Account Strategy. Set a goal of 1k, 5k, etc. Once you hit that number then start putting more to your credit cards.

This post originally appeared here.

Matthew B. Brock, CFP®
Senior Partner, Owner
Divergent Planning, LLC
matt@divergentplanning.com

Securities and Investment Advisory Services Offered through H. Beck, Inc., Member FINRA, SIPC.

H. Beck Inc. and Divergent Planning are not affiliated.Senior Partner, Owner