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