Thanks to an inheritance, Cheap Geek had the ability to pay off his credit card. He was, however, reluctant to use his financial windfall, wanting to rough it his own. Every month, he’d squirrel away a portion of his earnings and direct that towards his card. Continuing at the rate that he was going, he’d be able to pay everything off within eight to nine months.
Clearing debt on one’s own terms is an admirable aspiration. Unfortunately with a 13% p.a. credit card and a 5.5% p.a. savings account, it wasn’t a thrifty one. By not paying off the credit card tout de suite with his inheritance, Cheap Geek was paying an extra 7.5% p.a. of whatever was outstanding*. Each month he dithered, he was losing up to $130 in interest.
Always, always, always pay off debts off first before trying to save. Pay high-interest loans (i.e. credit cards) off before tackling low-interest loans (i.e. mortgages). Any financial windfalls such as inheritances, tax returns, or salary bonuses should always be directed towards reducing your debt.
Of course, this only works if you’re genuinely committed to spending less that you earn. If you think that a credit card balance of zero will simply entice you to rack up more debt, it might be better for you to keep your financial windfall somewhere out of reach.
While Cheap Geek didn’t use all of his inheritance to pay off his credit card, he finally put some of it towards the credit card to speed up the repayments. He is now proudly debt free. 🙂
*Plus taxes on his savings.