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Friday, May 23, 2008

Frugal debt payment?

The last place I want frugality to play a part in my life is in my debt payment. However, lately I've been struggling with the idea of decreasing the amount of money I send to my credit card each month in order to beef up my emergency fund. I wouldn't normally do this, but with the possibility of a labor strike looming in the next six months, I really want to have a bit more padding in that EF account.

I've been going back and forth on this issue, unwilling to totally commit to the idea of paying just the minimum on my credit card---even if temporarily. The satisfaction of watching the balance shrink each month is just too compelling! I also just found an online calculator that illustrates just how long it will take to repay a credit card when paying just the minimum. Here's what the calculator told me:

"If you make only the minimum monthly payment suggested by your credit card statement, by the time you pay off your $2,899.00 balance, you will have made 141 payments (that's 11.75 years!) and you will have paid $656.64 in interest charges!

Plus, if you were investing the average monthly interest charge -- instead of sending it to the credit card company -- at only a 7% return, you could have earned roughly $1,025.08 during the same 11.75-year period. That represents a total cost of $1,681.72!!"

This particular calculator is unique in that it actually exposes the opportunity cost of paying that interest charge each month, rather than investing it. However, what it doesn't (and truthfully, can't) address are the people who do something beneficial with the money they would have sent to debt repayment. In my case, that extra money is going into a savings account earning 3%, which can be used later should I need it. Granted, I pay 4.99% on my credit card balance, so this is something of a losing proposition. But the emotional payback may be worth it. I hope I don't have to go on strike next fall. But if I do, I'll feel much more comfortable having money in the bank to pay bills while I'm on the picket line.

In the end, my gut tells me to continue adding money to my emergency fund. However, to assuage the side of myself that gets a kick out of watching the credit card balance shrink, I'll send more than the minimum to American Express---maybe I'll even go 50/50, as a frugal compromise. I haven't yet created my June zero-based budget, so we'll see how things shake out then. If you were me, what would you do?


Debt Dieter said...

Could you split the total and pay half on your card & the same amount into your emergency fund?

That way you're still paying more than the minimum, but you can boost your savings at the same time?

Debbie M said...

Try entering different amounts into that online calculator. Even adding one dollar over the minimum may look much better than paying just the minimum. Once you see those results, you might have a better idea of how much extra you want to send in. You may be able to send in quite a bit less and not have to pay for all that much longer.

You could also try entering your interest rate as 2% (your net interest lost) instead of 5%, under the assumption that you could use your extra savings to pay off the credit card later, if you get through the coming scariness okay.

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