Which first -- increase saving or eliminate debt?

Question: I have heard that it is important to have a cash emergency fund. But I have several thousand dollars in credit card debt. Wouldn't it be smarter to pay the credit cards off first, since the interest I pay is much higher than the interest I would earn saving in a bank?

Answer: Your math is right. Your thinking is wrong.

Did you evaluate your choices mathematically when you decided to rack up a boat-load of credit card debt? No?

Wasn't it a series of small, poorly-thought-through, spur-of-the-moment emotional decisions that got you into credit card debt? It usually is, because credit cards simply allow you to spend money you do not yet have, in anticipation of being able to repay it at a future date plus about 1/5 of the purchase price paid as interest.

Credit card debt is simply savings in reverse. Traditional savings is a pattern of (a) save-save-save, (b) earning interest along the way, (c) then purchase.

Reverse spending (also known as credit card debt) is a pattern of (a) purchase, (b) then repay-repay-repay, and (c) pay more interest along the way.

Looks kind of stupid just reading it like that, doesn't it?

So let's lay aside the myth that math or numbers has anything to do with getting into, getting out of or staying out of credit card debt.

So if math isn't the key, what is?

Habits, my friend. It's all about habits.

I cannot think of one person I have ever met who is not either (a) in credit card debt or (b) a habitual saver. I'm not saying there isn't one out there, I just have not met her yet.

The late John Savage taught that there are only two kinds of people, economically speaking: those that spend first and save what is left over. And those who save first, and spend what is left over.

And Savage always wryly pointed out that the first group always ended up working for the second group.

Do you want to get out of debt and stay that way? Change your habits. Here's how:

You have to do two things at once: (1) pay your debt off slowly, and (2) put as much as you can into the bank.

If your credit card debt is $10,000 and your minimum monthly payment is $175, it will take you about ten years to pay that off, assuming you add nothing to it (big assumption!). Assuming 18% interest, your finance charge each month is about $150. Add that $150 to the $175 minimum payment and pay $325. By simply adding the monthly finance charge to your minimum monthly payment, you will pay off the card in less than four years.

During that four year period, you want to be saving as much money per month in your bank savings account as possible. You need to shoot for 10% of your monthly earned income, but if that thought makes you faint, start out with 5%. If you can save $500 per month, you'll have about $20,000 in the bank about the same time as you have paid off the cards.

Get out of debt slowly and form new financial habits slowly.

If you stick with this plan, it will stick with you.