When it comes to getting rid of debt, it seems like the best option is to pay it off as quickly as possible. This is especially true of credit card debt. It’s high interest, so you should just pay off what you can, as quickly as you can, right? Not so fast.
It’s actually possible to pay off your credit cards too fast. Wait, what?! Here are three reasons to take a step back and evaluate whether or not you should pay off your credit cards immediately.
1. You Don’t Want to Completely Drain Your Emergency Fund
If you have a chunk of change in your emergency fund, it might be tempting to just take the lump sum and pay off your debt.
The problem with this though, is that you open yourself to financial vulnerability if an emergency crops up. You might have to turn to your newly-paid-off credit card. When that happens, you wind up back in debt, and you’ve got no emergency fund on top of it.
There’s a reason financial experts suggest you keep at least $1,000 in an emergency fund before you start paying off debt. That way, if something happens, you can cover it without going further into debt. Don’t deplete your emergency fund in an effort to get rid of debt right now.
2. Watch Out for Cutting into Your Regular Expenses
You feel rich on payday. You feel like you can put $500 toward debt, and it makes sense. Pay it off faster and win right?
Unfortunately, you might not actually have $500 to put toward that debt. What about your regular expenses, like groceries and insurance premiums? Have you looked ahead to the bills you will need to pay in two or three weeks?
Your debt payment needs to be based on your budget and grounded in the reality of your regular monthly expenses. If you aren’t looking at all your monthly expenses, and just throwing money at your credit cards without a plan, there’s a good chance that you will need to turn to those credit cards in order to get through the rest of the month.
That means you take a step back for every step forward. Instead of getting excited and putting a large amount toward debt when you get paid, make it a point to map out your budget. Look at your income and expenses. Then make a debt payment plan that calls for an extra debt payment based on the money you have available.
3. Don’t Put Your Future at Risk
Finally, it can be tempting to take a loan out from your retirement account in order to pay off your debt more quickly. However, that can be a bad idea as well. Even though you are “paying yourself interest” on the loan, the reality is that you can’t replace the time the money is out of the market.
Another potentially dire consequence is that you could suddenly end up needing to pay the whole retirement account loan back at once. For instance, the entire loan comes due within a few months if you lose your job. The amount becomes an early withdrawal if you can’t pay it back — subjecting it to penalty and taxes. That could put you in an even worse position.
Just because it seems like you should pay off your credit card debt quickly, doesn’t mean that you should be so extreme that you put your overall finances at greater risk. If you are looking to pay off your credit card debt, ensure you have a budget and financial plan in place so that your daily expenses and emergency fund are covered first.
Article Source: Miranda Marquit for moneyning.com