debt

Stop saving to pay off credit card debt?

Steve BucciQuestionDear Debt Adviser,
I am a 29-year-old independent female. I am extremely diligent about contributing to my company's 401(k) and my own savings plan. I have approximately $100,000 in my portfolio. The only debt I have is a $7,500 credit card bill. (I moved across country and put the entire move on my credit card).

I hate having this debt, but withdrawing the funds from my savings is totally out of the question. I have absolutely no problem making the monthly payment; I just want to pay it off as soon as possible. Should I put my savings contributions on hold and concentrate totally on my debt? Please don't tell me to look for ways to trim my budget, as I am extremely rigid in following my budget. I have excellent credit, so getting professional debt counseling is not an option either. I would love to have your input.
-- Stephanie

AnswerDear Stephanie,
First of all, congratulations. For someone not yet 30, you are making some great financial decisions. I can tell from your description that you are a strong young woman who is proud of her independence. Your dedication to a disciplined lifestyle can be a virtue, but I urge you to be careful, as it may blind you to new possibilities.

Your dismissal of debt counseling is an example. The counseling is confidential, could provide you some outside perspective and would not affect your excellent credit. So, please keep an open mind to my suggestions.

Something I'd like you to keep in mind is that having some unsecured debt -- the move you financed with your credit card -- is not necessarily a bad thing if you have a plan in place to repay it. Its very existence seems to be bothering you, so let's decide the best way to pay down the balance quickly.

I recommend a repayment period of not more than one year. To meet that goal, you would need to make a credit card payment of approximately $655 each month. My suggestion is to keep making your 401(k) contribution (particularly if you have an employer match) and use half the money you would otherwise be placing in your personal savings to repay the credit card debt. Should you be unable to meet the required payment amount to be debt-free in one year with only half of your personal savings contribution, then you have some decisions to make.

One, you could lengthen the time it takes to repay the debt based on the monthly amount you can manage. A payoff term of three years would mean a monthly payment of $238, and a two-year repayment would be $342 per month. But you and I would be unhappy with a three-year credit card debt hanging out there.

Two, I'd suggest taking enough money out of savings to pay down the balance sufficiently so that you would be debt-free in a year. I know you don't want to touch your savings, but an important aspect of saving is to help avoid unwanted debt. Plus, you'd still be saving something.

Lastly, my guess is that you manage your taxes the same way you do other things. So, I expect that you will be getting a refund in 2011. Plus, your moving expenses may be tax-deductible if you moved for a new job and meet the IRS criteria. I'd apply your refund to the debt payoff pot.

Moving forward, I would encourage you to segment your savings so that a small amount each month goes for planned expenses such as new furniture, plus something fun -- a vacation, a new fall wardrobe or anything else you might want. I also want you to build an emergency savings cushion of at least six months, but not more than 12 months, of living expenses.

Keep emergency savings in an old fashioned bank account, not a CD, so that you can access them for unexpected expenses like a move across the country. When money is used from the account, just replace it as quickly as possible. This gives you a structure for your savings and permission to spend money without guilt or feeling like you are raiding your nest egg.

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