The Arrow

There are no answers; only choices.

Credit Card Payments vs. Savings

Posted by thearrow on April 3, 2011

Although I haven’t talked about money at all on this blog, managing it is one of the things that preoccupies me constantly, as my friends can attest from endless conversations on the topic. So I figured it would be interesting to share the way I approach money and the many quirks that involves. My method is probably madness for a lot of people, but it does make sense to me. And, who knows, maybe others will find useful tricks. Or know what not to do (ha ha!).

By no stretch of the imagination am I suggesting that you do what I do. I’m not giving any financial advice to anyone. God knows I could probably benefit a lot from some myself. But what I do is sometimes unconventional and other times maybe extreme or maybe pound foolish. You’ll decide what can work for you.

Today I’ll just talk about the classic advice of paying off your credit card debt with your savings. The argument goes that you pay more interest on your credit card than you earn on your savings, therefore, rather than lose money, you should use your savings to be debt-free. It sounds like the common-sense thing to do and very rational. And that’s the problem I have with it. I’m a big fan of behavioral economics. Not that I know a lot about it, but I like its premise–that people behave irrationally (while unaware of it) a lot more than they behave rationally. And that it’s better to observe how people actually behave and then come with solutions molded on that reality, rather than offer precepts to follow. It’s the prescriptive vs. descriptive tug-of-war linguistics has had to contend with for a long time. When it comes to money, I’m on the descriptive side of things.

Which is why I prefer NOT to deplete my savings to pay off my credit card debt. As nice as it would be not to pay the monthly finance charge and as liberating as being debt-free is, I prefer the safety of my savings. That’s just how my mind works. I have a spreadsheet with each and every expense, no matter how trivial (down to two-dollar cups of coffee), and for each of them I note the date it’s going to be paid. I have a plan and that keeps my mind at peace. Most of the time my payment plans stretch across years, but that’s fine with me because I’m the kind of person who’s more nervous if she doesn’t have a plan than if the plan is complicated.

And, of course, just like I have a plan for payments, I have one for savings. So I know precisely how much I have set aside and how much I’ll have in my savings account at the end of the year. And I know exactly what purchases I’ll be paying off on the credit card next time I get paid. I can’t wait to tell you about my savings strategy.

But an even more important reason why I don’t want to use savings for paying off my otherwise pretty big credit card debt is that I almost never get to replenish my savings, and that just makes me furious. There will always be reasons to spend. Stuff comes up. That’s life. Instead of putting money back in savings, I’d have this false sense of affluence and I’ll end up spending more than I want to.

Every single time I said, I’ll just pay the credit card and replenish it later, it almost never happened. Or I never finished it. I have thousands of dollars to put back in savings and they’re all on a list. Nowhere on the horizon, ready to materialize. Knowing that I have to pay my credit card debt makes me more aware of how little disposable income I have and how responsible I need to be with new purchases. And yes, sometimes that involves some extreme belt-tightening, but that’s a story for another day. I’ll just say that I’m happy to tighten my belt in order to stick with my plans and make progress on both the credit card and the savings fronts. I do a little bit of both each time I get paid and I derive a lot of satisfaction from marking my progress.

So there’s today’s lesson in harnessing your own irrationality when it comes to money :).

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