Save or pay down debts?

Today I saw yet another article advocating that people put extra money to paying down credit cards before saving. The logic is sweet - credit card interest rates run 6-36%, so the rate of "return" from paying down a credit card is higher than you can get on savings.

Still, I disagree. Remember the scene in It's a Wonderful Life, where the bankers close with two one-dollar-bills left to their name, and have a honeymoon party for the dollars, telling them they'd better go make some babies, quick? Savings actually does breed.

Savings creates a habit of saving. Once a balance adds up to something meaningful for you (for the poorest savers, even a $10 balance becomes a significant chunk of money), you want it to keep growing. It becomes a reminder not to spend more than you need to. Financial psychologists talk about creating an anchor - a mental reference point against which one evaluates all other expenditures. Savings creates an anchor point based on how much one has saved - a far, far lower anchor than, say, the limit on a credit card. The saver remembers how long it took to save that $100, $500, $5000 balance, and that memory gets balanced against the desire to purchase an expensive luxury.

Furthermore, savings is a reliable source of cash in a crisis. Credit cards can cut limits, close accounts, and raise interest rates - making the credit card less reliable in a crisis. If a crisis hits - an unexpected major repair bill, for example - most consumers are better off pulling the money out of a savings account. Put it on the credit card, and it becomes a stepping stone to creating a habit of putting expenses on the credit card.

Credit cards can resemble the little shoe box of tax receipts - out of sight, out of mind - and one more receipt not filed, one more expense not paid off, eh, it's just one more. But one more withdrawal from a savings account - we take note. We develop affection for our little savings accounts of love, the little financial leprechauns that are meant to take care of us in our time of need. It hurts to hurt them. And spending money we can't afford should hurt. It says, hey, that's the third time we've withdrawn savings this month; we've got to change something. Credit cards don't say that until the balance (or minimum payments) hurt, and, then, it's a mighty big problem to solve.

Building a savings account is like eating healthier or exercising. It reconnects us with the big picture around our money. It teaches us about the positive effects our financial life can provide, in addition to the negatives. Credit cards' positive feedback system is like crack or heroin - it can give you joyous experiences (big purchases, vacations), but those positive experiences destroy your financial insides. Credit card interest is like rotting teeth, the balance like a cancer, slowly eating away at your financial future. It's so bleak, it can create a craving for one more high; one more won't matter. The feel-good times with credit cards are when we do things we shouldn't do. The feel-good times with savings happen when we do things that are good for us over the long haul. Open up the statement - look, it's up another hundred dollars! Cancelling cable becomes worthwhile, as we see the positive outcome grow and grow.

Once a person (or family) has 3 months emergency savings established, that's the time to start whittling down the credit card. But I think a family should keep putting at least a little money into the savings account, even just $5 or $10 a month, to keep the positive-feedback loop going, keep putting at least some financial brain energy to building a better future.