Cash Question: Pay Down Debt or Save

Q: I lost my job a few months ago and I have a mortgage and other bills to pay as well as high credit card debt. I am making some income freelancing but barely enough to pay my bills. Should I use any additional income over and above my bills or savings to pay off my credit cards now?

 

A: Being in debt, particularly credit card debt, is an uncomfortable feeling, especially when you do not have a steady job. So, naturally, you want to do whatever you can to get rid of the uncomfortable feeling that a lingering debt has. However, in any situation, reacting hastily may only bring you temporary relief.
Let’s say you use your available cash/savings to pay your credit card off or down, then your consulting income starts to dwindle and you are still not able to find a steady job. At that point, you may not even have enough cash to cover your mortgage and basic living expenses because all your available cash has already been used up.

According to the US Department of Labor web site, it takes the average unemployed worker 31 weeks to find a new job in August 2014. Of course, the length of unemployment will also be very different depending on the type of job that you are seeking and your location. But, given these general statistics, I would say that it is better to keep at least 6 to 9 months worth of cash available and pay the minimum, or maybe a little more than the minimum, monthly on your credit card. Anything that you make in consulting income can be used to cover expenses, to the extent possible, and then, if there is any extra, you can also use that towards paying down your credit card balance.

Having a plan on how to handle your situation and pay down your credit card bill over time may be enough to at least lessen that uncomfortable feeling. Often times, that uncomfortable feeling comes from feeling out of control and not knowing what to do. Taking time to think about your situation and what needs to be done and to set a plan may significantly reduce your discomfort.

If you have any more questions, please don’t hesitate to reach out.