You will be able to explain why people hold savings while paying high interest on debt, and what it costs.
Darren's untouchable account, from lesson 3.1, holds S$16,000. His credit card has carried a balance of around S$4,000 for most of the past year. When a friend asked why he didn't just pay off the card with his savings, Darren's answer came out instantly: "That's my emergency money. If I use it, I'll have nothing." He hadn't thought about what the arrangement cost him. Once he worked it out, he went quiet for a while.
This is one of the most common and most expensive forms of mental accounting. Savings sit in one jar, labelled safety. Debt sits in another, labelled spending or "the card". Because the jars feel separate, nobody compares them. Yet the bank sees one customer, and so does your net worth.
The cost is the gap between two interest rates. Savings accounts pay a modest rate. Credit cards and many personal loans charge a much higher one. Rates change and differ by bank and product, so check your own statement and your bank's website for yours, but the gap between what a card charges on a balance and what a savings account pays is usually wide. Every dollar sitting in savings while an equal dollar sits on the card is effectively borrowing your own money back at the card's rate.
Rates in percent are easy to nod past. Dollars per year are harder to ignore. Here is Darren's situation with example rates: his savings earn 1% a year and his card charges 26% a year on the balance he carries. Treat both as examples and use your own figures when you do this.
His S$16,000 in savings earns about S$160 a year. His S$4,000 card balance costs about S$1,040 a year if he carries it all year. Together, the two accounts lose him about S$880 a year. Most of that loss is invisible, because interest earned shows up as a small cheerful line on one statement and interest charged hides in the total on another.
Suppose he uses S$4,000 of savings to clear the card. He's left with S$12,000 earning about S$120 a year, and pays no card interest. The net position goes from losing about S$880 a year to earning about S$120, a difference of roughly S$1,000 a year from moving money between two accounts he already has. These are simplified figures. Card interest is usually charged daily or monthly and can compound, so the real cost of a carried balance is often a little higher than the simple sum.
There is a good reason behind Darren's instinct. An emergency buffer protects you from having to borrow at a bad rate when something goes wrong, and Money Foundations, lesson 6.1, A starter buffer comes before extra debt payments, sets out why a starter buffer comes first. Draining savings to zero to clear a card is not the goal.
The problem is holding far more than the buffer while paying for costly debt. Darren worked out his buffer target in Money Foundations as S$9,000. Anything above that, S$7,000 in his case, is money doing a worse job than it could. Clearing the S$4,000 card still leaves him S$12,000, which is S$3,000 more than his own buffer target.
The other honest objection is behavioural. Some people worry that if they clear the card with savings, they'll run it up again and end up with no savings and a full card. That risk is real. If it applies to you, pair the payoff with a rule that stops the card refilling, such as paying it in full every month from now on or lowering the card's limit. Module 8 covers rules like this. Credit and debt: scores, cards, loans and BNPL explains how card interest works and what the alternatives cost.
The same comparison works for any saving and borrowing you hold at the same time: a personal loan alongside fixed deposits, a car loan alongside a large savings balance, a BNPL plan alongside cash in an e-wallet. Some pairs are fine. Keeping a cash buffer while paying a home loan at a lower rate is normal, because the gap between the rates is small and the buffer protects you. What you're looking for is the pair where the gap is wide and the savings are well above what you need.
Darren paid off the card the following week. He also lowered its limit and set up a full monthly repayment by GIRO, because he knew himself well enough to want a fence. The untouchable account kept its name. It got a new rule: untouchable except to clear debt that charges more than it earns.
Gather your own savings balances and debts with their rates, so you can see the yearly interest earned and paid on each side by side.
Write your savings and debts with their rates and the yearly interest earned and paid on each.
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