For dual-career married couples navigating the intricacies of personal finance together, striking the right balance between paying off credit card debt and building savings can be challenging. This choice affects not only your financial health but also plays a significant role in the dynamics of your relationship.
Before diving in too deeply, let's be clear about two things:
Any credit card debt is bad. You should do everything in your power to avoid it.
A minimum of 3-6 months of expenses set aside for emergencies is good.
This post highlights the factors you should consider to make informed and cooperative decisions that align with your shared financial goals.
The Psychology Behind the Decision
Financial decisions are rarely just about the numbers but also about the emotions and psychology behind them. The choice between paying off debt and saving is influenced by each partner's financial upbringing, experiences, and inherent biases towards money.
Some may view debt as a heavy emotional burden, leading to stress and anxiety, while others might prioritize the security that savings bring, especially in uncertain times.
Recognizing and discussing these psychological factors can help both partners understand each other's viewpoints and make a decision that feels right for everyone involved.
It is fair to say that heightened yet healthy anxiety about credit card debt can be productive if it leads to paying off the credit card debt faster.
The Relational Aspect with Your Spouse
Communication is vital in any relationship, especially when managing finances together. Deciding whether to prioritize debt repayment or savings should be a joint conversation that reflects shared priorities.
This includes discussing your financial fears, goals, and what each of you views as a financial safety net. It's crucial to approach these talks without judgment, understanding that each partner may have different but equally valid perspectives.
Using myself as an example, having any credit card debt would lead to me spiraling out of control with anxiety. I'm not sure I could focus well on anything else if I ever had credit card debt, and my spouse would need to recognize that under no circumstances could I be happy while in credit card debt.
Related: What is a Money Date?
Assessing Your Emergency Savings Balance
The general recommendation is to save three to six months of living expenses. This fund is a financial buffer that can help you manage unforeseen expenses without adding to your debt.
Understanding the Interest Earned on Savings
While building savings is crucial, it's essential to recognize that the interest earned on a standard savings account is typically much lower than the interest paid on credit card debt.
Therefore, every dollar saved in a low-interest account could cost you more if you carry high-interest credit card debt.
A good rule of thumb to consider is that when the interest rate on your debt is greater than the interest earned from saving, you want to pay down the credit card debt as fast as possible.
Evaluating the Amount of Credit Card Debt
Consider the total amount of your credit card debt. High levels of debt can be crippling due to the high interest rates charged by credit cards. If this is the case, consider more aggressive repayment strategies to avoid prolonged periods of high-interest payments.
Analyzing the Interest Paid on Credit Card Debt
Credit card debt is often the most expensive type of debt due to exceedingly high interest rates. Evaluate how much you're currently paying in interest and compare it to the earnings on your savings. There are countless credit card interest calculators you can find online.
That said, some credit cards allow for 0% interest for a short period of time. If money is tight and the yields on your savings account are high, consider saving aggressively and paying down your credit card debt aggressively just prior to interest kicking in.
The Bottom Line
What I said from the outset should drive your decision-making:
Any credit card debt is bad. You should do everything in your power to avoid it.
A minimum of 3-6 months of expenses set aside for emergencies is good.
Eliminating all credit card debt before building your emergency fund makes the most mathematical sense and has the most positive impact on your credit score.
Some would argue that a hybrid plan could be a compromise in deciding how much to allocate for saving and paying down credit card debt. An example would be to set aside an arbitrary amount of savings, say $500, to establish a psychological precedent that leads to being a saver.
The decision between paying off credit card debt and saving isn't just about financial calculations—it's also about understanding psychological factors, maintaining healthy communication with your spouse, and setting up a plan that supports your joint financial health and relationship stability.
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