Savings plan step 2: Pay off credit card debt

America Saves Week was February 20 to 27, 2011 and even though I am late to the party, it’s never too late to talk about the importance of saving.

Many people who struggle financially are reluctant to talk about saving since they have more pressing priorities, such as repaying credit card debt. However, eliminating the topic of saving entirely can be detrimental to your future financial security. Experts agree that becoming a successful saver can be dependent on developing good savings habits. So, instead of putting the topic of savings on the back-burner, try to reframe the way you think about debt repayment. In other words, make removing the barrier of credit card debt Step 2 of your savings plan, right after you establish an emergency savings fund.

One of the ways America Saves encourages consumers to make progress on their savings goal is to reduce debt. In fact, about one in six people enrolled with America Saves chose ‘paying off consumer debts’ as their wealth-building goal. If you are wondering how paying off debt can be considered savings, consider this example.

Say you have $100 per month. Your choices are to (A) put the money toward paying of a credit card with the current average interest rate of 15% or (B) invest the money in balanced stocks and bonds with an expected rate of return of 8%.

After a year, applying the $100 to the credit card debt would result in a one year interest savings of $86. The same $100 invested at a hypothetical rate of return of 8% could result in an after-tax amount of $34. Another way to look at it is that, after a year, you would have saved yourself $52 by focusing on the debt. It is likely that the benefit would be even greater since this scenario assumes that you will actually get the expected rate of return for your investment and that your credit card interest rate doesn’t go up.

You can analyze your own scenario by using this Should I Pay Down Debt Or Invest My Monthly Surplus? calculator.

You might also enjoy reading:

What does it mean to save?
Baby steps to rebuild your emergency savings fund
How do you feel about your current savings plan?
From spendthrift to saver

Kim McGrigg is the former Manager of Community and Media Relations for MMI.

  • The Consumer Federation of America (CFA) is an association of nonprofit consumer organizations that was established in 1968 to advance the consumer interest through research, advocacy, and education. Today, nearly 300 of these groups participate in the federation and govern it through their representatives on the organization's Board of Directors.
  • The National Council of Higher Education Resources (NCHER) is the nation’s oldest and largest higher education finance trade association. NCHER’s membership includes state, nonprofit, and for-profit higher education service organizations, including lenders, servicers, guaranty agencies, collection agencies, financial literacy providers, and schools, interested and involved in increasing college access and success. It assists its members in shaping policies governing federal and private student loan and state grant programs on behalf of students, parents, borrowers, and families.

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  • The National Foundation for Credit Counseling® (NFCC®), founded in 1951, is the nation’s largest and longest-serving nonprofit financial counseling organization. The NFCC’s mission is to promote the national agenda for financially responsible behavior, and build capacity for its members to deliver the highest-quality financial education and counseling services.