Question: My bank is a big national one, and I won’t call them out by name. But man, does their savings account rates suck. I’m talking less 1 percent interest! I Googled around for higher rates, but they were mostly the same. I finally saved a couple grand in my new job and don’t want to blow it. I plan to put one grand toward my credit cards and another in the bank. But it doesn’t seem worth it. Any thoughts?
— Jason in Atlanta
Howard Dvorkin CPA answers…
My first thought is: Forget the savings account. You say elsewhere in your email that you’re carrying just under $5,000 on three credit cards. All of them are charging you around 13 percent interest. The math seems simple: Earn 1 percent in a bank or save 13 percent by paying down those cards.
It gets less simple from there.
Saving for a rainy day
You don’t mention if you have an emergency fund. The concept is simple: You need enough savings to pay your bills for a certain length of time, just in case you lose your job, get sick, or face an unavoidable major expense (like a home or auto repair).
How much you should keep in your emergency fund is a matter of some heated debate among financial experts. U.S. News says 3-6 months, while Dave Ramsey suggests a flat $1,000 until you’re out of debt. Other experts fall somewhere in between.
I see the wisdom in each argument, but here’s mine: Even $500 is better than nothing. So don’t get hung up on amounts, just get into the habit of saving.
Let’s assume, Jason, that you put $1,000 of your savings toward your highest-rate credit card. Let’s also assume you want to preserve that other $1,000 as an emergency fund, but as you said, you want to earn more than a measly 1 percent.
You have options. Money market accounts offer slightly higher rates and are FDIC-insured, but they have some restrictions, such as high minimum balances. You could also attempt a CD ladder, as explained by my friends at Bankrate, but this limits your access to the money to every six months.
However, my recommendation is to simply not worry about interest rates on $1,000. At 1 percent, you’ll earn $10. Even if you earn 5 percent, that’s only 40 more dollars. Focus instead of keeping that $1,000 for a rainy day and whittling down those credit card balances. If you need help with that, call one of our certified credit counselors for advice at 1-888-503-5563.
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Email your question to firstname.lastname@example.org and Howard Dvorkin will review it. Dvorkin is a CPA, chairman of Debt.com, and author of two personal finance books, Credit Hell: How to Dig Yourself Out of Debt and Power Up: Taking Charge of Your Financial Destiny.