Cash On Hand…Or Debt Free?

I had a conversation last week with a young woman. She had received a year-end bonus that was almost equal to her credit card debt.

She asked me if she should completely pay off her debt or hold onto the cash.

I told her to hold on to the cash and pay her debt off over time.

My reasons were two-fold: first, when you need cash, there is no often no substitute, and it’s good a good feeling to have cash in the bank.

Second, paying off debt should be a deliberate, even painful experience in order to emphasize the importance of not getting into it again.

I know that some will say the interest rate on the debt is higher than the interest on savings. My reasoning is contrary to math, but to me it makes sense: get accustomed to having money on hand and not touching it. Suffer through the debt repayment process. Move forward.

I don’t know what she’s going to do. My question is this: do you agree with the advice I gave her and the reasoning behind it?

Looking forward to your comments. Thanks.

  • BGT

51 thoughts on “Cash On Hand…Or Debt Free?

  1. BGT,

    That’s actually terrible advice! (I’m surprised because you’re usually fairly spot on.) CC debt is the highest interest rates, she’s probably paying over 20% a year, which will end up eating up the cash regardless. Keep a $1,000 in an emergency fund, then take the rest and pay down debt. Track expenses, cut up the cards, keep only a debt card, pay cash, continue to build a larger emergency fund, start investing in index funds etc… Dave Ramsey has a decent plan for getting out of debt and staying out.



    1. Thanks, ATC. I’ll keep an open mind on this in the future, but the ‘don’t touch the principal’ rule is a little engrained in me…and quite a few others. I always consider how long it will take to re-save that $10,000 (or whatever amount is in question) and make it whole again before using it to pay off a series of past mistakes all at once. And does someone have the discipline and discretionary income to do that.

      So there’s two sides to it, and, as we’ve read, probably more. Always welcoming your comments and participation. – BGT

  2. If the young woman appreciates classical music, culture, nature, books and uses a discreet scent, thus might be a lady, the advice is: keep cash, she can handle it.

    If the young woman appreciates popular music, Instagram, shopping city trips and is addicted to attention, thus might not be a lady, the advice is: pay debt because there will be more ahead, until she finds that rich man.

    1. JL,

      Please explain the correlation of liking classical music, culture, nature, books and not paying off high interest debt while keeping cash with probably zero interest? If she likes nature, books, and culture, she can enjoy those qualities with little money required. It’s free to enjoy nature, there’s an unlimited amount of cultural events in Paris that are free or close to free, and enjoying books can be free with a library card, or borrowing from friends. Pay off the debt, be responsible.

      1. Sir/Madam,

        Thank you for your contribution, which was not entirely unexpected.

        One could refer to words written by Harvey C. Mansfield, describing how the “calculator” is the one who sees everything through the lens of profit/loss, hence will always favour the former and opt for minimal risk, even at the cost of a somnambulous existence.

        Further on, he writes: “unlike a gentleman, Quatermain is interested in money”. Indeed, the protagonist from H. Rider Haggard’s novel “King Solomon’s Mines”.

        Not unrelated, the famous defense of chivalry, by Edmund Burke, at the imprisonment of Marie Antoinette, was an attack on modern calculation: “the age of chivalry is gone. That of economists and calculators has succeeded and the glory of Europe is extinguished forever”.

        Thusly, the materialistic view, even if valid within its own reasoning, might not be a universal truth.

  3. If there is no emergency fund (cash on hand), I’d create a little emergency fund so that one won’t be tempted to bring out the credit cards if a car needs a repair or the washing machine breaks down. After that, I’d put it toward the debt. Paying 21% interest is enough of a life lesson,

  4. Keeping a bit of CC debt is not a bad idea and having some cash on hand is good idea. Depending on the amount and the person I would have also considered dividing the bonus into three parts (not necessarily equal): cash, pay down debt and invest in stocks.

  5. JL,

    It’s Sir, and one also could refer to the actual post, lest we forget that this was a “save or pay-off debt” question. As universal truth goes, according to Albert Einstein – “Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it. Compound interest is the most powerful force in the universe. Compound interest is the greatest mathematical discovery of all time.” This young lady would be best advised to get out of the financial crushing weight of double digit compound interest, and over-time be responsible and use it to ones advantage.

    Speaking of Old Money, here’s a quote from King Solomon.. “The rich rule over the poor, and the borrower is slave to the lender.” Proverbs 22:7. 😉

    Byron – tell her to pay off her debts and go and sin no more…

    1. Dear friend of modern science,

      Thank you for this most fascinating debate. However, you refer to math in its vernacular sense, as taught by the professoriate. Philosophical and math aptitude are exactly the same thing. Math is episteme (ἐπιστήμη), but moral science is ratio. Math in the tradition is the simplest form of the mind’s access to the eternal. In the modern science it is subordinate to ephemeral results, scientific so-called “facts”, or experimental “success”.

      One is not familiar with King Solomon, but he seems to have been the kind of host who’d get his guests in a soporific state, halfway dinner.

      Perhaps it would be worthy to examine your arguments in the light of Lewis Lapham’s words:

    2. High ATC
      I would be very careful with proverbs from Bible. There is difference between paleo-Hebrew and Hebrew. The same goes with old and new Greek. Check when the first Bible was written and check also difference between translation and transliteration. Word “Kristos” was originally an adjective, but over time it “somehow” became a proper noun. I would not count on Bible, while it is interesting reading, proverbs including. Debt is awesome once you know how to benefit from it. Time is money, they say.
      Regarding compound interest check FED rates (they will go negative, SOON) and it is certainly not the greatest mathematical discovery. Try Giordano Bruno. Good luck!

    3. For “scientific” math lovers: What is natural logarithm of negative 1 (-1)? Math is not science; there is nothing to observe in math. But, let mi give you a chance.
      Use mathematical predictability to calculate when you will be rich. It is just a question of crunching numbers.
      Salvation though knowledge? Come on.

  6. I would have advised her to transfer the debt into a credit card that offered an interest free period of time for balance transfers, then I would have her move the bonus money into an internet checking account that pays a higher interest rate, then divide balance due by trial months and transfer from checking to the debt balance.

  7. I see your point, but I disagree. Number one, the mathematical aspect: debt is expensive. Number two, the psychological aspect: using the bonus to pay off the debt will be a painful but valuable lesson. Keeping the debt may lead to more frivolous spending and paying it down gradually may not drive the point home as well. The OMGs I know avoid bad debt, like credit card debt, like the plague.

    1. I just realized that the last sentence in the comment above could be read as “The OMGs I know avoid bad debt but they like credit card debt and they like the plague.” I should have said “The OMGs I know avoid bad debt, such as credit card debt, like the plague.” I should have been an editor.

  8. I’d say pay off the debt immediately, and if you are young, without family, get another part time job to pay for the things you’d like, maybe considered frivolous, now. As a young woman, I bought a house, had renters, held jobs, dressed in clothes I wouldn’t think of spending money on now (the brand names, the shoes, etc.), traveled a lot, enjoyed meeting a ton of new people I’d probably not meet without the “fun” job and opened myself up to new experiences. Now, as a mom, I spend money on my kids and think of myself last when it comes to clothes (I still wear what I can that I bought years ago). I reminisce when I was that pretty lady in very nice clothes and a cute little body people noticed in the street. I don’t want that attention anymore. I look back on the travels, the people, the experiences I had, and do not regret a thing. Maybe it’s because I had that extra job to pay for things I wanted, but didn’t need. I don’t have debt to burden me, or those memories may not be as great as they are now.

  9. Hi Byron – At the Surprise Millionaires, we would say to not accrue unsecured debt in the first place. However, if someone finds themselves in that situation, I would use a half and half strategy. Save half of the amount for a rainy day and use the other half to cut the debt. Paying off half the debt over time still accomplishes the “painful lesson” that needs to be taught, but would also give this young lady a cushion to fall back on in times of struggle. Just my thoughts. Have a great day!


  10. Assuming no tax ramifications, I say stay out of debt. Personally, I abhor debt. At the very least, I would have told her to use half the bonus to pay down the debt, but even that would require a weak moment on my part!!

    1. I like the half idea. There is less of the debt accumulating interest but still some cash on hand.

  11. I agree with ATC. Debt enslaves one in more than a single and obvious way. There is no better feeling than to be debt free and to also have cash. Even the smallest amount for a care-free cup of coffee knowing when one walks away from the cafe, nothing is owed, no one is harmed and a pleasure was enjoyed.

    Tell the lady to pay her debt and then save.

  12. I understand your reasoning, Byron. Becoming used to having money and leaving it untouched is something that takes time and new habits (discipline during online sales, for example…). Did you also recommend she read your books? As others have mentioned, she needs to avoid further accumulation of debt otherwise advice about how to pay off this debt won’t matter either way.

    1. Hi Phillippa, happy new year! I suggested she hold onto the cash in order to get that ‘Don’t touch the principal’ mindset locked in as she suffered through debt repayment. It would make her less likely to spend if there’s no room on the credit card, and those painful payments hit every month. Math-wise, it’s not logical. Psychologically, it’s a real muscle-builder. I think I gave the right advice for this person. But I always want to hear and learn from others. – BGT

  13. Agree with you – with one edit. Yes, feel the pain of the debt. That is, if one can afford to carry it longer. But also, put the cash in fund where it is possible but not easy to take it out, or else, she will just waste it for things which otherwise she’d have bought on credit. Hence, no true change for her and back in debt eventually. Pay the debt deliberately, invest the cash. Adjust wants to needs. But if she is truly hurting and in debt because of necessities, then I say pay off the debt now to get out from under the interest. “The borrow is the servant of the lender” (Proverbs).

  14. HI Byron. Where I am in life right now, I would say I agree with you. Knowing you have cash in the bank (earning some small amount of interest) provides peace of mind. However, having been in this person’s shoes in a former life (memories blocked out), I would agree with others’ half and half approach. Unless you can say with absolute certainty that this person has learned the painful lesson, then the problem will just occur again. Both issues are important…no debt and cash on hand….so trying a half-way approach might help. I’m usually not a half-way person, but the commitment must be cemented before the behavior will change. I wish this person all the best and applaud their effort to ask for the advice in the first place.

  15. How about an “inoculation” approach, where a small dose of the virus builds long-term immunity? Pay off 95% of the debt to appeal to the rationalists, but leave 5%, honoring Byron’s thinking, to serve as a lesson in debt maintenance. Fees and interest will accrue over time, as will her hatred of them, until, like Poe’s tell-tale heart, her conscience is agitated to the point that she repays the remainder in a fit of fiscal prudence. Nevermore!

  16. Agree, however with different reasoning.
    1 – with cash on hand she can buy hard assets –ancient money.
    2 – pay debt with brutally depreciating currency on monthly bases. Currency is loosing purchasing power – that’s why governments love inflation on printed currency – they call money. Money and currency are two very different things.
    Single troy ounce of gold in 1971 was roughly $42. As of now it’s $1556. Calculate increase in %. You get the number. Is this how much $ devaluated against money? Hard to believe, I know. OM counts generations not weeks, months, years.

  17. Certainly do not buy a house. You never own the house, garage ……. Rent instead. Look at old calatrava on your wrist. Do you pay tax from it? No! You own it! Is there any power, which will dictate when to put it on your wrist? or prevent you from passing it to your son/daughter? After all does your government know you have an old calatrava or Bernini? Do you pay property tax? Well, you do not own it, though. The owner of the house is the one, who sets conditions under which you will use “your” property. Careful there!

  18. How much is her present income? How much is the CC debt? What is the interest rate of the CC? Many variables here. My inclination would be to pay the CC debt asap; it’s bad debt.

  19. If it were almost any other type of debt, I would agree. As others have noted, however, credit card debt carries such a high interest rate that now is likely not the best time for that particular learning experience. Moreover, one could argue that depleting her cash reserve should force her to learn to build a reserve from her forthcoming basic income. That could be a more valuable lesson in the face of likely 15-23% interest rates!

  20. Some of the comments here are a bit strange. That not withstanding, and given that this is an “old money” blog, I would like to comment first on the uses and abuses of debt:

    Perhaps an “old money” approach would approve of debt for productive, or at least long-lasting, expenditures, for example debt accrued while in med school or engineering school, mortgage debt, debt acquired in starting or buying a business — that sort of thing. On the other hand, financing short-term consumption by way of debt is not a good idea at all. Unfortunately, credit-card debt is almost always accrued for short-term consumption.

    Now, regarding Byron’s question: If the subject understands what I have just said, she is well advised to pay-off the credit cards and sin no more (as mentioned by another poster). If she doesn’t understand, however, she well needs to learn, in which case Byron’s advice to develop discipline by holding cash is well put.

    So, I would say the proper advice depends as much on the mettle of the debtor as it depends on the details and calculations of the situation.

  21. You gave quality advice. When my cash was lower, I financed a car and paid it over time boosting my credit. As my cash balance became large enough, buying a car outright made more sense and was more gratifying. The key issue was that “cash is king” for a reason. Once you have it in sufficient quantity, you have more options. If you have enough cash on hand you can either finance items or not, you will not be a default risk and your credit will grow, which is more important than any nominal negative spread you are paying in interest. Also, when I was younger, I had the exact amount of money in my bank account as my student loan balance. If I had paid it all off I would have had no reserve which came in handy when I got my first apartment. Liquidity has a cost but Old Money knows the value.

  22. Pay off the credit cards. The apply for new ones with an introductory interest free period 9 months, 18 months ext. Build a cash reserve so that this may be paid off in time.

  23. Depending on how much savings she had, Tully’s advice is spot on. Dave Ramsey vastly underestimates how much can go wrong when you only have a thousand dollars on hand. It’s one car repair and one broken ankle from being wiped out.

    As Mister Money Mustache says, stash the cash.

  24. I just discovered your blog and I look forward to reading more. I am very late to this discussion but my thought would be to pay off the entire balance. From my experience it is easier to increase a credit card balance if there still remains a balance. A completely paid off credit card feels like a fresh start. I can appreciate though that these are exceptional times and more cash on hand could be useful.

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