My girlfriend is currently sitting on about $5,000 in savings while she has about $5,000 in credit card debt. With an interest rate on the card around 20%, it really bothers me that she hasn’t paid it off, while providing the reason that she’s scared something might happen, and she’ll have nothing in savings. How can I explain this to her? There has to be an emotional part of this, but I want to show her that she can be debt free and get on with life.
This is a bit of a doozy. We’ll be the first ones to admit that providing unsolicited advice to somebody else face to face on what to do with their finances, no matter the good intentions can often result in hurt feelings. While you can take solace in the fact that you are right that she should be kicking every cent she has at that toxic debt, it’s also important to remember that she also has a fear in the back of her mind that a financial crisis of some sort could hit, and she doesn’t want to be left holding the bag.
One thing your girlfriend should understand is that by carrying this debt while she has the money to pay it off in savings, she is losing $875 per year, assuming she is getting 0.5% interest in her savings accounts. Keeping this up for 5 years would nearly destroy her savings, and leave her with nothing to show for all of the effort.
This is the kind of situation where the emergency fund comes into play. With the smaller emergency fund of about $1,000, your girlfriend can use $4000 and pay off 80% of the debt, letting her keep some peace of mind, while also managing to save her about $720 in interest in the next year. After this, the next step would be to tackle the remaining $1000 of credit card debt as aggressively as possible. If she puts $200 a paycheck towards it, she’ll be free from it in 5 paychecks, and she can work on re-building her emergency fund back up to $5000. This would likely be the best of both worlds, because it would provide a second benefit to her of ensuring that she has the money available from the budget to not only take care of her expenses, but also to save money for the future, After her 5 paychecks, she probably wouldn’t even miss the money from her paycheck, and she could go on to applying to to her retirement savings.
Until next time, go snack on some debt!