Save or pay off debt? See how much it costs

Saving money and paying down consumer debt are both great things to do.

It’s very important to do them in the correct order and with the correct weighting, though.  My take is that saving an emergency fund of a reasonable amount should be done first.

But once that emergency fund is in place, pay down the debt before saving a lot more.

Why is that?  The savings account at this point almost certainly pays less in interest than what you’re paying on your debt.

Consider a typical savings account.  You’ll be lucky if you’re making 1% on your money.  That doesn’t even keep up with inflation.

We have a used car loan that’s incredibly low: 1.99%.  And even that one has a higher rate than what we’d get on a savings account.  A typical credit card rate is in double digits:  14.99%, 17.99%, or even 21.99%!

You’re filling your bucket but ignoring the holes in the bucket

Think of your net worth as a bucket.  Think of your savings account interest as an open faucet that is filling the bucket (income).  Think of the credit card interest as holes in the bucket (expenses).

Water is flowing out of the holes in the bucket much faster than it’s flowing into the bucket from the faucet for the same amount of money in your savings account and on your credit card.  The faucet is dripping in, but the water is gushing out.

Debt costs.  A lot.  Consider the cost before you save any more at nothing-point-peanuts.

After saving up an emergency fund, paying down high-interest consumer debt is usually the clear winner over saving more.

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