Tuesday, July 03, 2007

Savings vs Credit Cards

Like I mentioned in my June Spending Analysis; I have a new savings and credit card philosophy. To keep things simple, I have a single credit card. Usually it's used to cover things I cannot afford out of my checking account. For example; back in January my cat had a veterinary bill that was most untimely. That went on the credit card. Nothing small goes on the credit card. It's pretty much for emergencies. My savings account is nothing spectacular, but I know it's important to me to save money every pay check.

Pay yourself first is a great rule, but an inflexible one that is hard to live by. I have created a "flexible pay myself first" plan. I have a minimum and a maximum amount to put in savings every pay day. The minimum is a number I know I can live without. Something ridiculously low like $10. No mater what, every pay day my savings account will get $10. I have a medium number, like say $25 (keep in mind these aren't my numbers I'm just making them up), that is what I really try to put in savings every pay day. If all is normal and nothing unexpected comes up, $25 is put away. Then I have a best case scenario number, something like $100. That's what I put away if I'm living frugal and I'm ahead on my bills. If I'm trying to make a serious dent in my credit card debt, I'll cut the savings down to my minimum number and make larger payments towards my credit card (like I did in June).

I have a savings account and a credit card, basically they're opposites. One interest rate works against me and one works for me, albeit the one that works for me doesn't work nearly has hard as the one that works against me. It makes since to sacrifice the savings account to pay off the credit card, but here is the conundrum. If I wipe out my savings to pay off my credit card, when something comes up, like unexpected auto repair, the only way to pay for it is from the credit card again. It's a good idea to keep some much in savings while working to pay off the credit card. Granted the credit card may take a little longer to pay off, but at least you're not leaving your self without a way to pay for emergencies. This way, when the credit card is payed off there is still money in savings to fall back on.

The next conundrum is, once that card is payed off, do I destroy it and never look back? Personally I don't think it hurts to have at least a single credit card, preferably with a zero balance. In my own case I cannot access money in my savings account unless I manually transfer it to my checking. So in an instance I need to pay a large bill I can put it on my credit card that has a zero balance, transfer the same amount from my savings to my checking, then make an immediate payment on the credit card. Although the steeps involved seem redundant there are a number of advantages to this. First of all, all this can be done on line within a few minutes after getting home from paying that big bill. Secondly, because of the process I'm less likely to use my credit card on smaller purchases that could be payed for with my check card. Another advantage of this is I have a better bead on where my money comes and goes. My girlfriend hates it when I whip out my spreadsheet of accounts and study the numbers, but the time I spend doing that helps me see how my spending effects my financial situation. Lastly, I have a credit card with decent rewards. If I have to put some unexpected auto repair on my credit card I at least get a little something in return. If I have the ability to pay it off from savings immediately, it's basically getting something for nothing. I don't pay any interest, and I still get credit card reward points.

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