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Steve Bucci, the Debt AdviserCredit card debt vs. emergency funds

Dear Debt Adviser,
I have a significant amount of credit card debt that I have accumulated through the years -- about $18,000, actually. My credit is fine. I pay more than the minimum payment and on the small balances I pay it in full each month. I know one of the reasons why the balances haven't decreased is because I continue to spend money on things I "need." I have $13,000 in my savings. I've been trying to start my emergency fund while paying down my debt. My question is: Should I use my savings to pay off most of my debt? Thank you.
-- Rachel

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Dear Rachel,
Ah, yes, those things we "need." They'll get us every time if we're not careful. Using your savings now to pay off your debt is not something I would recommend. You are clearly spending more than you are earning, and I am concerned that if you bled your savings to pay your debts, you'd be so impressed with your new low balance that you would spend back up to the $18,000 limit or beyond. I am also worried that you think things are fine, and yet you have a credit card debt level that would choke a horse!

Let me tell you about two of the people who came to see me during my credit counseling days. One had a $500 balance for the first time and thought the world was going to end. Another had 23 credit cards and, until the last one maxed out, didn't think he had a problem. You are not at that extreme ... yet, but really, you are in more danger than you think, especially if any of life's little surprises interrupts or lowers your income. What you really "need" is a better plan. Let's see if we can get you started.

First, set some goals. I know you want to get out from under your debt and establish an emergency savings cushion. That's a good start, but this is your time to dream about what you would like your life to look like in the future. Maybe a vacation, a new car or home, or even some retirement thoughts. I suggest you write them down. There's just something about writing down your goals that make them seem more real.

Next, get a spending diary and track your expenses very carefully for one month. I want you to account for every single thing -- every cup of coffee, every pack of gum, every item you buy when you make a quick stop at the drug store, in addition to the bigger things such as your monthly bills and groceries. At the end of the month, sit down and itemize your spending by category in a way that makes sense to you. I think you will be surprised by how much cash you lose every month on the little things. Again, seeing it in black and white makes it much easier to cut down on these "money gobblers," as I call them.

Now you get to make some decisions. You know where your money is going. Is this what you want? If not, you can make changes and your goals listed earlier will be your incentive to do so. This will help you consciously decide on what you need versus what you want and might help slow down adding new debt to your credit cards.

To address your emergency savings, once you have your expenses under control, I'd like to suggest that you save money you don't have! I mean that you should make a commitment that you will save at least half of any future raises, bonuses, tax refunds or windfalls. Earmark this money for your emergency savings account. Once you've built your account to three to six months of your living expenses, you can apply your savings to those goals you've set for yourself. Remember that it is not so much how much or how fast you save, but how regularly you do it. Make it a priority and you will find you'll be riding that horse, not choking it!

Good luck!

The Debt Adviser, Steve Bucci, is the president of Money Management International Financial Education Foundation and the author of Credit Repair Kit for Dummies. Visit MMI for additional debt advice or to ask a question of the Debt Adviser go to the "Ask the Experts" page and select "debt" as your topic.'s corrections policy -- Posted: June 2, 2006
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