Financial question

[davi_el_mejor]

I have always wondered about which one to do first, pay off debt or increase savings.

Due to poor financial planning in my younger years, I have accumulated a nice bit of credit card debt.

There are two options in my mind:

I can pay them off in 18 months if I forgo putting money into savings. After there paid off, put what I was paying monthly to the cards into my savings, and in 18 months I would have what I owed in card debt in cold hard cash, earning me interest.

Or, I can cut the payments to the cards in half and have them paid off in 40 months and slowly build a nest egg until the cards are paid off and then put the full amount in savings.

or if you have any other ideas let me know! I'm all for ideas.

The 5 year goal is to buy a house. I have decent credit, but it could be better. Hence, why I want to increase my available credit ratio. That is what really lowers my score.

 

[stone-cold11]

Clear the debt. Credit card interest is much too high. Whatever interest you gain in saving will never come close to what the credit card is charging for the debt.

 

[Taylorbug!]

It would depend on the rates on the credit cards. However, I am inclined to say "pay off the cards first", or instead of doing 1/2 to each, maybe 3/4 to the cards and 1/4 to the savings. That way, you will have some savings should an emergency occur. Then you won't be tempted to use the cards getting into more debt. JMHO. Hope that helps! BTW, I am in the financial industry...and have been for about 30 years.

 

[Shoopy]

The only way, IMO, that you can be truly saving with credit card debt is if you have a savings interest rate that is equal or higher than your credit card interest rate. If your CC interest rate is 20% and your savings interest rate is 2%, you're not really earning money. And considering that interest earned on a savings account is taxable, your actual earnings is even less.

So my vote is to pay down the debt first and then save.

Of course, in practical terms you'll want that rainy day money BUT unless you are expecting huge changes in the next coming months, even something such as a car breaking down can be put on a credit card if it is truly an emergency.

 

[megumic]

I always say first and foremost to protect yourself, which means to have an emergency cushion. That said, I also think having zero credit card debt is hugely important. If you already have an emergency fund (4-6 months worth), then you're in good shape. If you don't have an emergency cushion, that should come before buying a house.

If I were you, as someone who is borderline obsessed with finances, a good credit score, making smart financial decisions and being practical, I would put 3/4 the money into paying off the CC debt and 1/4 the money into savings. This way you are reducing your debt significantly enough to not continue to pay exorbitant interest, but at the same time setting you up to have an emergency cushion in case of worst case scenario.

 

[stephbolt]

I think Dave Ramsey's model is a smart one.

He suggests you first build a $1000 emergency fund to cover any unexpected expenses that might arise.

Then pay off the debt, focusing on one card at a time if your debt is spread across several cards. Once you pay off one card, add the amount you were paying on that card onto the next one, and so on. Some people like to work from highest interest rate to lowest interest rate, some like to work from smallest balance to highest balance to get the satisfaction of paying off a card sooner.

There's no type of savings account you can put money into right now that will get you a return better than the amount you are losing to interest by not paying off the cards sooner.

Good luck!!

 

[soocool]

Always pay your debts off first.

With multiple credit cards, pay off the one with the smallest balances first and then if the others are really high see if they could be combined (transferred to one card) so that it can be handled more easily. Rethink your spending until you have paid off most of your debt. Then increase your savings. Get bank accounts with free checking and do not use your debit card! Make sure you at least contribute the minimum to your 401K to reap your employer's matching contribution.

 

[boredstiff]

I would save an emergency fund first (~3-6 mos. of expenses) then aggressively pay off that debt. Once the debt is paid off, start saving for 20% to put as a down payment on the house. I would wait to buy that house until you have 1) no debt 2) emergency fund saved 3) 20% down payment saved and 4) extra $5K saved for closing costs, furnishings, etc. Even then you are a job loss away from financial disaster given the state of the job and real estate markets and the size of your emergency fund. How important is it for you to own a house?

ETA: I would also suggest compiling your expenses for the past 12 months and calculating your burn rate. What are you spending money on and where can you trim. A dollar saved is a dollar earned. You can use mint.com or something similar, which will automatically categorize your expenses. For example, I moved into a smaller apartment and saved over $10,000/yr. I also started bringing my own lunches, saving $5/work day. See what you can do with your own spending until you are on your feet.

 

[House Cat]

I think Dave Ramsey's model is a smart one.

He suggests you first build a $1000 emergency fund to cover any unexpected expenses that might arise.

Then pay off the debt, focusing on one card at a time if your debt is spread across several cards. Once you pay off one card, add the amount you were paying on that card onto the next one, and so on. Some people like to work from highest interest rate to lowest interest rate, some like to work from smallest balance to highest balance to get the satisfaction of paying off a card sooner.

There's no type of savings account you can put money into right now that will get you a return better than the amount you are losing to interest by not paying off the cards sooner.

Good luck!!

Ditto

 

[davi_el_mejor]

Thanks guys!

I'm a little embarrassed to say how much CC debt I have, it's a lot. Like I said, I was young and stupid. It's close to the 10k mark. But, like I said, I'm in a position to have it paid off in 18-19 months.

Steph, I like that idea too. It would only push back my plan by two months... Much better than the 5 outlined below.

The plan is to pay $500 a month to CC bills. My lowest balances are also the highest interest, so that's a no brainer right there. I can have three cards paid off in 4 months. The bulk of the debt is on two cards. Both are low interest for a CC around 8.8%.

If I put $400 to the CC's it will take 24 months, and put $100 in savings by the end of 24 months I'll have 2400 in savings.

In case of emergencies, I can get an interest free loan from work if I have too.

After all my utilities and rent are paid, I have something close to 1k a month in extra funds that go to food and incidentals. So, $500 isn't too much for me to put into CC's or savings.

The SO and I would love to have a house. I would love to have one before I'm 30, which is in 5 years. I'll be saving and the SO will be saving for the down payment. Granted, I can get a VA home loan which often, doesn't require a down payment. But paying into capital is way better

 

[geckodani]

I would definitely suggest paying off credit cards first. As others have mentioned, there's no interest rate out there for savings that will equal what you're losing in interest.

Just a thought -there is an option involving 0% interest balance transfers that I utilized when I was paying off my own younger-self accrued debt. I found a card offering 0% APR on balance transfers and moved my debt off of the other cards and onto that one. Make sure it's an offer that lasts long enough to get your debt paid off - if you lose the 0% before you've finished clearing the debt and the APR jumps to 20% or whatever it defeats the purpose. And the kicker with this plan is that you MUST pay it off just as if it was still accruing interest. But without the added interest in there, you might have some breathing room to also build up a cushion etc.

 

[Dancing Fire]

pay off your CC as soon as possible!!. stop paying them "loan Shark" interest rates....

 

[Asscherhalo_lover]

I am in a similar situation. I put most of my money towards paying off credit card debt & paying down student loans but I still put a fixed amount into my savings every month for a rainy day. I don't want to have to add to the credit card debt that I'm trying to pay off! That's how you never get rid of it. I like having my emergency fund for sure.

 

[Dancing Fire]

I would definitely suggest paying off credit cards first. As others have mentioned, there's no interest rate out there for savings that will equal what you're losing in interest.

Just a thought -there is an option involving 0% interest balance transfers that I utilized when I was paying off my own younger-self accrued debt. I found a card offering 0% APR on balance transfers and moved my debt off of the other cards and onto that one. Make sure it's an offer that lasts long enough to get your debt paid off - if you lose the 0% before you've finished clearing the debt and the APR jumps to 20% or whatever it defeats the purpose. And the kicker with this plan is that you MUST pay it off just as if it was still accruing interest. But without the added interest in there, you might have some breathing room to also build up a cushion etc.

in 2003 i use the 0% interest CC to pay off the last $20k of my mortgage.i make sure that we pay off the CC company before the 0% offer expires or i can transfer the balance to another 0% CC if i so desired.

 

[AGBF]

in 2003 i use the 0% interest CC to pay off the last $20k of my mortgage.i make sure that we pay off the CC company before the 0% offer expires or i can transfer the balance to another 0% CC if i so desired.

We always pay off our credit cards at the end of the month, so we never have any credit card debt. My husband and I have a huge disagreement about mortgages, however, and our real estate lawyer said that some people feel strongly one way and other people feel strongly the other.

Dancing Fire, by mentioning that he paid off his mortgage (my fondest wish), brought our age-old disagreement to mind!

My husband always want to have a mortgage and always wants to be able to use it for income tax deductions. He apparently learned in business school that the longest possible mortgage was the best and he accepted this as if it were dogma. If we refinance, he always wants to take out yet another 30-year mortgage!!!

His only concession to me (who would like to own the house-whichever one we are in at the time) is that we keep paying it down, although we keep taking out 30-year mortgages with which to pay it down!

As I said, our real estate lawyer said there are two kinds of people: those who want to pay off the house and those who say they will never be without a mortgage.

Deb/AGBF

 

[elrohwen]

Deb, that is fascinating - I never knew there were people who didn't want to pay off their house as soon as possible!

 

[Sizzle]

I didn't vote because I don't believe in putting all of your money in any one place if you don't have to. I think I'd put 3/4 into my credit cards and 1/4 into savings until I built up a savings cushion and then focus on paying the cards.

 

[Tuckins1]

Pay it off, pay it off, pay it off!!! You can save after that- stop paying all that interest!!!

 

[partgypsy]

I like Dave Ramsey approach too. A small efund, just so small events don't derail you. If there is an emergency where drain that fund, stop making extra payments to cc to replenish that efund to that level (usually 1K) and then go back to paying off credit cards.

 

[elrohwen]

I agree with others about stashing away a small emergency fund of $1-5k, then paying off the cards. If you had an emergency, you wouldn't want to put the balance on your cards and then have even more interest to pay off.

 

[Dancing Fire]

in 2003 i use the 0% interest CC to pay off the last $20k of my mortgage.i make sure that we pay off the CC company before the 0% offer expires or i can transfer the balance to another 0% CC if i so desired.

We always pay off our credit cards at the end of the month, so we never have any credit card debt. My husband and I have a huge disagreement about mortgages, however, and our real estate lawyer said that some people feel strongly one way and other people feel strongly the other.

Dancing Fire, by mentioning that he paid off his mortgage (my fondest wish), brought our age-old disagreement to mind!

My husband always want to have a mortgage and always wants to be able to use it for income tax deductions. He apparently learned in business school that the longest possible mortgage was the best and he accepted this as if it were dogma. If we refinance, he always wants to take out yet another 30-year mortgage!!!

His only concession to me (who would like to own the house-whichever one we are in at the time) is that we keep paying it down, although we keep taking out 30-year mortgages with which to pay it down!

As I said, our real estate lawyer said there are two kinds of people: those who want to pay off the house and those who say they will never be without a mortgage.

Deb/AGBF

Deb
what kind of business school did he go to?? tell him that for every dollar paid on interest the avg return is 30 cent. you will never come out ahead.

IMO...tax deduction on mortgage just a "mind thing" to make you feel good... 15 yr mortgage is the way to go if one can afford the higher payment.

 

[AGBF]

what kind of business school did he go to??

The kind that hires professors to tell students that 30 year mortgages are best. Any other questions?

Deb

 

[Shoopy]

Actually DF, with the right kind of financial plan keeping a mortgage can make more financial sense than paying it off early. Most people that go this route take into consideration their cash flow, how much it reduces your taxable income, and the kinds of investments you can make by not paying it off early. You have to look at what your interest savings would be vs what your tax savings are and what your investments will produce. And considering that many couples purchased when the interest rates were extremely low, it may be more of an advantage to keep it rather than pay it off. Of course you have to have the right kind of financial model in place, but something tells me Deb's husband is a whole lot smarter than someone who is doing it just for the refund.

 

[AGBF]

but something tells me Deb's husband is a whole lot smarter than someone who is doing it just for the refund.

Darn it, fiery! Why did you have to go and post this right after I sent my husband a link to this thread? Now it sounds as if what he is doing might make sense, after all! I was hoping that Dancing Fire's posting was going to knock some sense into him, but now it sounds as if you're on his side (and, what's worse, you sound smart about money).

Deb, feeling despondent

 

[Shoopy]

Well Deb if he is REALLY smart, he'll follow the motto that the wife is always right That's my grandfather's #1 rule and it hasn't failed him in over 60 years

 

[Dancing Fire]

Actually DF, with the right kind of financial plan keeping a mortgage can make more financial sense than paying it off early. Most people that go this route take into consideration their cash flow, how much it reduces your taxable income, and the kinds of investments you can make by not paying it off early. You have to look at what your interest savings would be vs what your tax savings are and what your investments will produce. And considering that many couples purchased when the interest rates were extremely low, it may be more of an advantage to keep it rather than pay it off. Of course you have to have the right kind of financial model in place, but something tells me Deb's husband is a whole lot smarter than someone who is doing it just for the refund.

nowadays = 0%!!

 

[zhuzhu]

Clear the debt. Credit card interest is much too high. Whatever interest you gain in saving will never come close to what the credit card is charging for the debt.

I agree.
Also the interest generated by saving accounts is so ridiculously low right now. You are not really gaining any benefit.

HOWEVER, it is ONLY if you already have 6-8 month of emergency fund saved up. Without the emergency fund, you may be in deep trouble if something unexpected happened.

 

[Dancing Fire]

what kind of business school did he go to??

The kind that hires professors to tell students that 30 year mortgages are best. Any other questions?

Deb

Deb,no Qs but can tell you this...i have two groups of friends most are ages b/t 50-55.
group #1) they carry no mortgages and are retired in their early to mid 50's.
group #2) say...i can't retire until we payoff our mortgage. this group #2 kept on refi into a new mortgage and start over after every few yrs,b/c they believe in the tax deductable B.S.

 

[swingirl]

If you have a lower house payment (because you re-re-refinanced for 30 years) and invest the extra cash into something, that's makes sense. But it you just blow the money on "life" I agree with DF. I know people in their 50s who are now stuck with a mortgage for twice what they bought their house for. Sure, they took nice vacations, bought nice cars and refinanced every time they wanted cash. But they'll need to sell their houses when they retire. It might be good for people who plan to do that anyway.

 

[Dancing Fire]

If you have a lower house payment (because you re-re-refinanced for 30 years) and invest the extra cash into something, that's makes sense. But it you just blow the money on "life" I agree with DF. I know people in their 50s who are now stuck with a mortgage for twice what they bought their house for. Sure, they took nice vacations, bought nice cars and refinanced every time they wanted cash. But they'll need to sell their houses when they retire. It might be good for people who plan to do that anyway.

it depends,if they owe more than what the house is worth then they just walk away and we as taxpayers are stuck with their mortgages...