Save Cash Or Pay Off Debt?

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Summary: Student loans and credit card debt are haunting a couple. Should they put their cash in savings or pay off their debt? With volatile credit card interest rates, it's always a good idea to get that debt paid down quickly and find out where you can save money elsewhere.

Q: My husband and I have about $5,000 in student loans on which we’re paying 4 percent interest. We also have about $2,600 dollars in credit card debt which is at a 0 percent introductory APR for one year. I try to save $100 dollars a month to have an emergency cushion, should we ever need it.

Although our student loans and credit card debt aren't too large, I feel them lurking over my shoulder. Should I apply my $100 per month I currently put into savings as extra money toward the debt instead? I feel I should, but my husband feels differently.

Should we save or pay down our debt? We don't have a lot of extra income and feel tight the way it is. There is no way we can save and add extra payments to our debt.

A: Good for you for trying to save something each month. The question is, what's going to happen when your credit card interest rate pops up to what it should be, at maybe 7 to 15 percent?

That's going to cause a notable pop in your budget. If you think things are tight now, watch out.

What you should be doing is put as much cash toward paying off that debt as possible. If you put your $100 per month toward the debt, you'll cut it in half by the time the interest rate adjusts.

But I also think it's a good idea to have some cash reserves handy. Either you’ll have to cut a number of expenses out of your life, or you and your spouse might want to discuss getting an additional part-time job. Then you can devote all of the income toward paying off your debt as quickly as possible, and building up an emergency reserve of savings. Once you’ve done that, you can start saving for the purchase of a home.

Although you may feel like you can't work any more hours, there are a lot of positives that can come from taking a second part-time job. At the top of the list is relieving the financial stress you and your spouse are currently feeling.

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Related Topics

• cash, 
• credit, 
• credit card debt, 
• credit cards, 
• student loans

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