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Save, or pay down card debt?

By Paula Pant ·
Wednesday, May 29, 2013
Posted: 10 am ET

If you carry a balance on your credit card and currently pay interest on the debt, should you try to amass cash in a savings account?

Many people's knee-jerk response would be "no." Why would you hoard cash in a savings account that pays 1 percent interest (or less) if you could instead use that money to reduce a higher-interest balance?

However, many financial experts disagree. They say you should build an emergency fund that can cover an unplanned crisis, even if that means your Visa balance continues to grow.

Experts differ about the minimum amount necessary to fund a solid emergency fund. Some recommend that you save only $1,000 while you're in the process of demolishing your credit card debt. Others say you should set aside a minimum of three or more months' of living expenses.

Common objection

People who object to building an emergency fund while they are in debt often argue that they can cover the cost of a crisis with their credit card.

From their perspective, focusing on paying down a debt balance (instead of building up their savings) allows them to shave away hundreds of dollars in interest payments. Meanwhile, if times get rough, they still have the option of using their card to cover any payments or expenses that arise.

The counterargument, however, notes that there is no guarantee you will retain access to your revolving credit. In theory, the card issuer could yank your credit privileges at any moment. Furthermore, adding to your debt may feel demoralizing.

So which piece of advice is best? Rapidly reducing debt makes the most mathematical sense, but it might create added risks. Saving a small emergency fund might "cost" you in extra interest payments, but could also help you sleep better at night.

Personal finance is personal, so I recommend that people choose their own path. But having a small cash cushion of around $1,000 for emergencies is a pretty solid idea.

Paula Pant blogs at about creating wealth and living life on your own terms. She's traveled to nearly 30 countries, owns five rental units and works for herself. Follow Paula on Twitter @AffordAnything.

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