Maintaining a Responsible Debt Cycle Depends on Always Saving Money

We are a nation in debt, it's true. But that doesn't necessarily mean that debt itself is always a bad thing. Debt does have its uses, but leaning to heavily on credit cards and mortgages is no less dangerous than playing with fire.  Allowing interest payments to overwhelm your savings and expenses can easily destroy your financial future.  If you have (and use) credit cards, then follow these tips to use your debt wisely.

Susanna Wilson is a 70-year-old living near the Sierra Nevada who is nearly over-the-edge financially because she has no savings and around $15,000 in debt.

This, to me, seems particularly scary, since I regularly rack up $5,000 credit card bills.  On the flip side, though, I pay off my credit cards every few months.  I have a bit of a "debt cycle" which runs from June-to-May.  In the summers, when I earn less money, I start to rack up debt paying for food and other expenses.  Some of this gets paid off during the fall semester, but then Christmas shopping and holiday travel usually set me back again.  I usually have my debt back down to zero by the end of the spring semester, but it's humbling to realize that the kind of debt I regularly rack up would be enough to push some people over the edge.

However, I have a few strategies I use to stay above water.  First, I always set aside money for savings - always.  I have a recurring $150 payment that comes right out of checking.  Currently, I have enough money in savings that I could cover a whole year of expenses, if needed.  I don't think that's nearly enough, but it's a start.  And I don't touch that money - it's for retirement, basically, or the "it's hit the fan" scenario.  Also, my car is paid off - if need be, I could sell it.  Yes, it's expensive to maintain, but I won't sell it unless I need to - it's cheaper to maintain my 2002 Volkswagen than it would be to buy a used or even a pre-owned vehicle, and there are situations when I really do need a car.  Like visiting my girlfriend, who lives six hours away - no, I simply can't afford plane tickets to see her every month.

Now, here's the main thing with my debt-cycle: I maintain this debt for a reason.  No, I don't like interest payments, but it does allow me to always maintain a $1,000 buffer in checking.  I never overdraw my checking account because I always have money available.  And $50 a month from that $150 is always going to my savings account - on a really bad day, I can bolster my checking account with another thousand dollars on 24-hours notice.

Basically, what I'm doing is paying my credit card company for the service of financial independence.  The downside is that it's expensive - I pay anywhere from $40-$70 a month in interest.  It's not a good strategy for saving money.  So I'm currently working on cutting my expenses so I can pay off the credit card every month, and then start saving more money.

Here's the thing: whether you pay for your groceries with cash or credit cards, you're still spending money.  If your expenses are higher than your income, you will eventually go bankrupt.  At the very least, you'll end up saving no money, and you'll expose yourself to the risk of serious financial meltdown later.  When you have no money in savings and a few thousand dollars sitting on a credit card, a single car accident could put you into a hole from which you might never crawl out.

Save money by reducing your expenses.  And realize that credit cards can be a part of your money-saving strategy.  Because of the balances I always keep in checking, I never pay for overdraft fees - and overdraft aren't only expensive, but they hurt your credit down the road.  Plus, keeping - and using - credit cards can slowly boost your credit score, allowing you to qualify for lower-interest loans when you get the point of buying a home or a new car.

Overall, credit cards give me the freedom to cover the major expenses that I simply can't avoid (e.g. plane tickets home for Christmas, car repairs, medical bills) whille also allowing me to see how much I'm spending overall.  (That big "woah, there's three-grand on my credit card right now..." can be a bit of a wake-up call.  But it only works if you don't hit the snooze bar...)