Save+pay off your credit card at the same time

Just before I start – I’ve spent about 3 and a half hours writing this article and creating a spreadsheet to test my theory. If you feel it has enlightened you don’t be afraid to shout me a beer through paypal or donate to the site in another way). Or simply send me an email to nomoneyau@gmail.com.

Got paid yesterday into my bank account. I got back from lunch and in 19 minutes I had allocated it all. I will have $9 in my bank account after my monthly direct debits (private health & church & $3bank fee) go through the account.

But the good news is – a lot of my pay has gone towards paying off my credit card debt (see my woeful tale of how I got sucked in here and how my credit cards spun out of control here ).

But (and here is where people will say I am crazy)…

I put $250 into savings this month – rather than paying off my credit card debt.

(note that if you can pay your credit card balance it might be best to do this – but if you are already paying interest on your credit card read on..)

Despite having a mortgage, car loan, credit card debts (of about$5,500) I put money into savings. And I will tell you my reasoning.I believe that…

1. The savings habit is more important than the net saved

Basically I believe that if you put every cent into your credit card every month (and like me watch what you spend so you pay it off quicker) – then by the time you finish paying it off – things will start appearing on your credit card. Either you will think of things to buy OR other things will pop up (you’ll need to go to the doctor/dentist, get your car serviced or registered, etc.)

And you won’t end up saving. But if you save a small amount (10% of your pay as mentioned in The one trick to Saving) you can get into a habit of saving. (Just as an aside – the one trick to saving was the very first article I posted because I believe it is the ONE MOST important tip I would offer to anybody)

2. You might not be much worse off

I wanted to see how much worse off I would be – so I created a spreadsheet just to see HOW much extra interest you would pay if you paid your credit card off VS. saved and put the balance into the credit card. (the spreadsheet I might give free to those who Sign up to the newsletter -do it now! or maybe put it so you can buy for cheap from the site)

So if I paid $1,750 a month off the credit card and then saved that amount vs. If I saved $250 a month and paid the balance ($1,500) off the credit card. Here are the variables:

Opening Balance 7,000 Savings 250
Interest Rate Paid 20% p.a. Repay after savings 1,500
Interest Rate Received 3.5% p.a. Double Save 500
CC Repayment 1,750

The First example shows what happens if once the credit card is paid off I put the $1,750 into savings for 12 months. (this is a BEST BEST case scenario – your are never going to put the whole amount you were paying off your credit card into savings).

Interest Interest Net Savings Debt Net
Option 1 Charged Received Interest Balance Balance Savings
Repay then save 306.62 137.45 -169.17 13,830.83 0.00 13,830.83
Option 2
Repay & Save 349.28 144.09 -205.19 13,794.81 0.00 13,794.81
Difference -42.66 -6.64 36.02 36.02 0.00 36.02

To make things more realistic the Second example is the same as the first except after paying the credit card off you will save Double what you initially saved (which is much more likely to happen in real life). So instead of saving $1,750 I would save $500 in this example (double $250).

Interest Interest Net Savings Debt Net
Option 3 Charged Received Interest Balance Balance Savings
Repay then save 306.62 41.07 -265.55 4,041.07 0.00 4,041.07
Option 4
Repay & Save 349.28 69.13 -280.15 5,069.13 0.00 5,069.13
Difference -42.66 -28.06 14.60 -1,028.06 0.00 -1,028.06

What the numbers mean

Besides the obvious simplicity of the spreadsheet (see below paragraph) – to me this means that if you save little and save often you will be building up a money tree. Rather than a yo-yo effect of splurging, living cheap to pay credit card, then splurging, etc. where you might never get a chance to save.

Obviously you will be worst off in the first few months doing this – but after a year or two – you might realise that setting aside a portion of your income that is YOURS ONLY – makes you feel good and happier to pay off your credit card as much as possible.

You might also find that there is no difference in paying 10% and not (I mean that you will still have no money at the end of the month!).

Added bonus (my flatmate puts it much simpler than I do)

It takes you longer to get out of debt but you have the added bonus of having saved more (e.g. if it takes me 5 months to get out of credit card debt and I save $250/month then I have $1,250 saved vs. if it takes me 4 months if I don’t save then I start from $0 saved)  .

How numbers can be misleading (and why this spreadsheet might not be accurate)

The above spreadsheet does not take the following into account:

1.credit cards accrue credit daily (I assumed monthly), 2.interest income is taxed (I’ve assumed no tax paid), 3. interest free days for credit cards (assumes you have a balance where you are paying interest).

Send an email to nomoneyau@gmail.com and let me know what you think.

Also remember that THIS MIGHT NOT WORK FOR YOU. THIS IS ONLY ONE IDEA. (our disclaimer is at bottom of the About Nomoney page)

Posted in Debt, Saving Money

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