Credit Card vs Savings – Public.xls (31 KB)
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Every time I see the interest fees from my credit card come through in the monthly statement, I can’t help but feel a panicked need to pay them off as soon as possible. After all, those fees are just money down the tubes, right?

But if paying off credit cards comes at the expense of putting money into savings, is this really wise? 

After asking myself these questions over and over again, I finally decided to put together a spreadsheet to better understand the trade-off I was making. 

I opened up Excel and started charting out two different scenarios. The scenarios and assumptions are outlined below, using some numbers I made up for this blog post (because you do not need to know my actual finances:). 

The assumptions were:
Credit Card Debt: $5000
CC Interest Rate: 10%
Monthly Discretionary Income: $400
Savings Interest: 1%

Save and Pay
In the first scenario, I divide my discretionary income ($400) in half, putting half toward my credit cards ($200) and the other half into savings ($200).  

Pay then Save
In the second scenario, I put everything toward my credit cards ($400) until they are paid off, then put everything into savings. 

I ran both scenarios until all of the credit card debt was paid off in scenario one. In this imaginary case, that’s 29 periods (i.e. months)

So what did I find?

The amount paid in credit cart interest in the “Save And Pay” scenario is greater by about $300 (which ends up in savings in scenario 2).  Over 29 months, that’s only about $10/month.  

Yet the “Save And Pay” approach gets you saving thirteen months earlier than the “Pay Then Save” method.

In this case, then, you’re paying about $10/month over 29 months for the security and peace of mind that goes with having money in the bank now versus over a year later.  
Is it worth it? In this case, I think yeah.

What do you think?  Would your situation be significantly different? How much would you be willing to pay per month for the peace and mind of accumulating savings?

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Two more technical notes: 

-The interest spread obviously matters a great deal. Since interest rates on savings accounts are relatively stable and consistently low compared to credit card interest rates, the latter is more important to watch. As it goes up, the “Pay Then Save” scenario becomes increasingly attractive. 

-The scenarios don’t account for unusual expenses that would require you to either use your credit card or dip into savings. Adding these in, however, would only make the “Save And Pay” scenario more attractive. This is because the expenses, unless very large, would likely have no impact on the time is takes to pay off the debt in the “Save And Pay” scenario, while they would extend the debt payment period in the early stages of the “Pay Then Save” scenario, increasing that scenario’s total interest fees.  

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