In a previous post about credit cards, a commenter made an excellent point. What he said made me do a reality check on how I think about money. He simply pointed out that if I paid off my credit cards, I wouldn’t have increased my net worth one dime. How could that be? And if my net worth doesn’t change, why should I even bother to pay off my credit cards?
It took a little bit of mental gear grinding on my end made the point clear. If I have twenty grand in cash and I pay off twenty grand in credit card debt, I haven’t increased my net worth a bit. That makes the assumption that I’m capable of saving twenty grand. The truth is that I’m not capable of that – or at least that I wasn’t. But if I do start saving money, why should I pay my cards of with it?
The answer is simple: interest.
The money I make on a savings account won’t exceed the money I lose to interest on cards. That’s why paying down the credit cards becomes so important. My net worth will increase because of my income and what I do with it. Bringing my net worth into the positive by shedding credit card liabilities with the income I earn is critical to my continued growth.
Of course, after I get my cards out of the way, I need to save. I’ve seen multiple sources recommend at least three months of savings (like a savings or money market account) as an emergency fund. But I’m getting ahead of myself. In the mean time, I’m using a small emergency fund and killing off those credit cards one at a time.