This was such an interesting conversation that came up I thought. Now the person told me that he had a credit card debt that had been accumulated because of Christmas and other things which gave him a debt of over $3000+. Now while he did not have cash funds that were immediately accessible to completely pay it off as he has it locked in for a set amount of time with plans that guarantee a small interest gain, overall he had more than enough funds to do so if cashing out was an option.
Now here came the interesting part. With the $3000+ credit card balance he mentioned that he would be paying over $500 a year in interest penalty which is about $41.67 a month. While I suppose that is not that much money when you think about it, in my opinion it is a bad habit to even have that debt in the first place and so I would be looking for a sensible way to get rid of it as soon as possible. One of my suggestions was that if one of those plans that he had was maturing I would be looking to cash out right away to pay off the debt or to find out if there was a penalty option in taking it out early if it made sense.
He then indicated that the credit card debt was manageable and so there isnâ€™t really a need to do that. My immediate response was that with the amount he invested with those guaranteed gaining plans and considering how low the rates are there is no way it would come close to the $500 a year he would be losing. For example, for these types of plans a lot of people say invest $1000 to $2000 and gain maybe 3% for the entire year. The best case scenario here is an extra $60 for the year. Does it not make more sense to pay off the debt? That example seemed to have opened his eyes afterwards.
I guess the important thing is to really understand your own finances as oppose to simply distributing your money in an emotional way rather than a logical one. Investing in this case might make you feel better as you can say to yourself at least you are doing something, but if it doesnâ€™t make sense based on your situation then you are only digging yourself deeper into a hole until you solve the root of your financial problem.