Should I pay off my credit card with my emergency fund?
“Every single day your high-interest debt goes unpaid, it's costing you money — a LOT of money — in interest,” Krawcheck says. Instead of putting your extra cash toward an emergency fund, she suggests that focusing all of it on credit card debt first will save you more in the long run.
While money parked in savings can be used to pay credit card bills, it should only be a last resort if the bill would otherwise go unpaid. It's ideal to keep savings for emergencies or future goals.
First things first: Build an emergency savings fund
Before you start deciding whether to pay down debt or build up your savings, you need to protect yourself with emergency savings. An emergency savings fund could help you avoid going into debt if you have to deal with unexpected expenses.
Investing and paying down debt are both good uses for any spare cash you might have. Investing makes sense if you can earn more on your investments than your debts are costing you in terms of interest. Paying off high-interest debt is likely to provide a better return on your money than almost any investment.
Having a reserve fund for financial shocks can help you avoid relying on other forms of credit or loans that can turn into debt. If you use a credit card or take out a loan to pay for these expenses, your one-time emergency expense may grow significantly larger than your original bill because of interest and fees.
The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings. The savings category also includes money you will need to realize your future goals. Let's take a closer look at each category.
How much should you save? While the size of your emergency fund will vary depending on your lifestyle, monthly costs, income, and dependents, the rule of thumb is to put away at least three to six months' worth of expenses.
| Investor's Age | Savings Benchmarks |
|---|---|
| 30 | 0.5x of salary saved today |
| 35 | 1x to 1.5x salary saved today |
| 40 | 1.5x to 2.5x salary saved today |
| 45 | 2.5x to 4x salary saved today |
Having any credit card debt can be stressful, but $10,000 in credit card debt is a different level of stress. The average credit card interest rate is over 20%, so interest charges alone will take up a large chunk of your payments. On $10,000 in balances, you could end up paying over $2,000 per year in interest.
50/30/20 budget
50/30/20 is a simple and classic budgeting rule that dictates how you should spend your income: 50% of your income should go toward “needs.” 30% of your income should go toward “wants.” 20% of your income should go toward savings and debt repayment.
How do I pay my credit card balance strategically?
- Paying only the minimum. The least aggressive debt payoff method is making only the minimum payments. ...
- Paying more than the minimum. Paying more than the monthly minimum helps accelerate your debt payoff and is a more active approach. ...
- Using a balance transfer credit card.
Here's the 'most basic rule of thumb'
As the credit card debt is higher interest and you carry a large balance on it, that debt is usually costing you more than your student loans. "Get that out of the way," he says. "Pay those balances down [and] find a way to accelerate the repayment of that debt."
Drawbacks of Emergency Funds
By adding money to an emergency fund, it reduces the option of allocating any additional funds to other programs, such as retirement savings or paying down a mortgage. Thus, emergency funds reduce the likelihood of achieving other financial goals.
Some people use credit cards as an emergency fund, but it's not a good idea to go into debt for emergency expenses. Emergencies will cost you more if you do this because credit cards have high interest rates. There are also some expenses that can't be paid by credit card, including mortgages.
- Tip #1: Don't wait. ...
- Tip #2: Pay close attention to your budget. ...
- Tip #3: Increase your income. ...
- Tip #4: Start an emergency fund – even if it's just pennies. ...
- Tip #5: Be patient.
Some Experts Say the 50/30/20 Is Not a Good Rule at All. “This budget is restrictive and does not take into consideration your values, lifestyle and money goals. For example, 50% for needs is not enough for those in high-cost-of-living areas.
Consider an individual who takes home $5,000 a month. Applying the 50/30/20 rule would give them a monthly budget of: 50% for mandatory expenses = $2,500. 20% to savings and debt repayment = $1,000.
- 50% for mandatory expenses = $2,000 (0.50 X 4,000 = $2,000)
- 30% for wants and discretionary spending = $1,200 (0.30 X 4,000 = $1,200)
- 20% for savings and debt repayment = $800 (0.20 X 4,000 = $800)
Your emergency fund should be based on your personal expenses. While $20,000 is a lot of money to have in the bank, it doesn't necessarily mean you'll be able to cover the three months of expenses you should be aiming for.
Emergency savings come in handy for all sorts of disruptions in life. Putting money in a high-yield savings account can help you pay for unexpected expenses, such as medical bills, or weather unexpected events like losing your job.
Is $5,000 enough for emergency fund?
Saving $5,000 in an emergency fund can be enough for some people, but it is unlikely sufficient for a family. The amount you need in your emergency fund depends on your unique financial situation. Consider these rules of thumb and other factors to calculate your ideal emergency fund amount.
It's definitely possible, but there are several factors to consider—including cost of living, the taxes you'll owe on your withdrawals, and how you want to live in retirement—when thinking about how much money you'll need to retire in the future.
£300k in a pension isn't a huge amount to retire on at the fairly young age of 60, but it's possible for certain lifestyles depending on how your pension fund performs while you're retired and how much you need to live on.
Running up $50,000 in credit card debt is not impossible. About two million Americans do it every year. Paying off that bill?
Having too many cards with a zero balance will not improve your credit score. In fact, it can actually hurt it. Credit agencies look for diversity in accounts, such as a mix of revolving and installment loans, to assess risk.
