Todays financial question...

[Jumpem]

It's common knowledge that you should have enough money saved to cover 3-6 months of living expenses.

But if you have $15k of CC/short term debt does it make sense to keep more than a couple thousand saved? It seems to me you would be better off putting the extra money towards getting rid of the debt instead of putting in your emergency fund.

Opinions?

 

[Homerboy]

no
pay of high intrest loans > * (except matched 401k)

 

[arcenite]

Originally posted by: Jumpem
It's common knowledge that you should have enough money saved to cover 3-6 months of living expenses.

But if you have $15k of CC/short term debt does it make sense to keep more than a couple thousand saved? It seems to me you would be better off putting the extra money towards getting rid of the debt instead of putting in your emergency fund.

Opinions?

No it does not make sense. You are losing more interest on your debt than you are gaining on the money you have saved (assuming you are talking about a checking/savings account)

 

[BlueWeasel]

I struggle with this as well.

My new wife and I just bought a house a few weeks ago. The down payment and closing costs pretty much depleted my savings, but we still have $10K or so in savings. We are planning on using some of that for furniture, etc.

But we've got about $7K in non-mortgage debts ($1K CC, $3K student loan, $3 vehicle payoff). We are paying extra on all of these and should have pretty much ALL of it paid off in a year or less. Should the savings be used to pay off the debt?

 

[geecee]

Originally posted by: Homerboy
no
pay of high intrest loans > * (except matched 401k)

I'd agree but it also depends on your personality, i.e. how financially conservative you are. Then again, if you spent that much money on your CCs, you're probably NOT financially conservative.

EDIT: spelling

 

[ryan256]

Having a financial cushion is great. But if it comes with $15k in CC debt your better off paying down the $15k. You will pay less in the long run.
If the situation arises where you need emergency cash guess what? You now have a credit card with a much lower balance. And while it may not be the most desirable course of action you can withdraw funds from that credit card to cover your sudden expense.

 

[ryan256]

Originally posted by: BlueWeasel

But we've got about $7K in non-mortgage debts ($1K CC, $3K student loan, $3 vehicle payoff). We are paying extra on all of these and should have pretty much ALL of it paid off in a year or less. Should the savings be used to pay off the debt?

Pay off the credit cards and maybe the vehicle but not the student loan! Interest on student loans is tax deductible!

 

[bonkers325]

pay off the debt because interest kicks your ass

 

[Kenazo]

Originally posted by: BlueWeasel
I struggle with this as well.

My new wife and I just bought a house a few weeks ago. The down payment and closing costs pretty much depleted my savings, but we still have $10K or so in savings. We are planning on using some of that for furniture, etc.

But we've got about $7K in non-mortgage debts ($1K CC, $3K student loan, $3 vehicle payoff). We are paying extra on all of these and should have pretty much ALL of it paid off in a year or less. Should the savings be used to pay off the debt?

Well, I'm not sure how the US does things, but in Canada student loans are tax deductible, so I wouldn't pay them off (unless they were at a high interest rate or something).

I would pay off that CC debt ASAP. @ 15%+ it's just sucking you dry. The vehicle... well, what's the interest rate on it?
Cash in the bank earning 2% is still taxable, for a net income of what, 1.5% after tax? While the interest paid on the CC and the vehicle are all after tax, so you have to remember you've already paid tax on all that interest you're dumping into those loans, so not only is the CC billing you 15%+, but you're also paying income tax on that money, bringing the true cost up another 20% (or whatever your tax rate is).

 

[Jumpem]

Originally posted by: geecee
I'd agree but it also depends on your personality, i.e. how financially conservative you are. Then again, if you spent that much money on your CCs, you're probably NOT financially conservative.

EDIT: spelling

We both tend to be financially conservative most of the time. Occassionally we splurge.

We both just finished school, and had to pay for it all ourselves. Most all of the CC debt is from my gf fixing her beater car, buying books, paying for her dorm room, etc. Some of it was unnecessary sure, but most of it I think of as valid debt.

But now that we are out of school, I want to pay alot of it down. I sold my car and we have a good bit left over each month to pay it down with.

 

[Jumpem]

Originally posted by: ryan256
Having a financial cushion is great. But if it comes with $15k in CC debt your better off paying down the $15k. You will pay less in the long run.
If the situation arises where you need emergency cash guess what? You now have a credit card with a much lower balance. And while it may not be the most desirable course of action you can withdraw funds from that credit card to cover your sudden expense.

This is what I was thinking as well. I want to keep $2k or so in my checking account to have a small cushion, and to keep from overwithdrawing if a simple accounting mistake is made.

 

[dxkj]

Put every cent you have towards the CC, the only exception would be when you might save more on a monthly house payment vs renting, and you need to save for a down payment, but that would take a lot to make it worth while

 

[DaWhim]

learn from this guy

 

[iwantanewcomputer]

dumbest question evar. people who do are even dumber. If anyone could consistantly make 20% APY investing in anything, they would be a god.

 

[Jumpem]

Originally posted by: dxkj
Put every cent you have towards the CC, the only exception would be when you might save more on a monthly house payment vs renting, and you need to save for a down payment, but that would take a lot to make it worth while

A mortgage paymeent and taxes on the houses I like would be one and a half times my rent. So that won't save me money.

I am trying to pay stuff off, but mainly I want to eliminate monthly payments to get a higher mortgage pre-approval. Unfortunately I won't really be able to save for a down-payment any time in the next couple years. I can come up with $2-3k for closing costs easy enough, but coming up with a $40k down payment isn't happening.

 

[zendari]

CC debt first.

 

[raystorm]

Originally posted by: DaWhim
learn from this guy

That is a fantastic thread! You could learn quite a bit from his whole experience. Thanks for the link.


..and to the OP.. just get rid of that CC debt as soon as possible. I owe 3K myself and will have enough to wipe it out completely by the end of the month. Just do it!

 

[Engineer]

Typically, I say CC first.

Scenario:

You have a real short term emergency:

With savings, you continue to pay your bills including mortgage and possibly CC. Worse is that CC doesn't get paid but mortgage does and you simply get a bad credit rating.

Without savings: You don't pay either and have possible forclosure on your home and/or vehicles (and still get a bad rating).

A cushion is advisable, but paying extra toward the CC is also advisable. Might not be a bad idea to split the difference just for a while until the emergency fund works and then shift all remaining disposable income toward CC.

YMMV and good luck. P.S. CC debt sucks!

 

[casper114]

Originally posted by: Jumpem
It's common knowledge that you should have enough money saved to cover 3-6 months of living expenses.

But if you have $15k of CC/short term debt does it make sense to keep more than a couple thousand saved? It seems to me you would be better off putting the extra money towards getting rid of the debt instead of putting in your emergency fund.

Opinions?

When you interest in debt outways the interest your earning in savings then no it doesn't.... but a rainy day fund is a neccesity.

 

[akubi]

go on the ramen diet and start saving :laugh:

 

[dullard]

The 3-6 months is ideal for the average person. The average person does not have $15k in CC debt (over half pay in full each month, and for the majority who do carry a balance it is quite small). Thus the 3-6 months rule doesn't apply to you. Too many people remember rules but they forget about the assumptions the rules need to be valid (this applies throghout life not just financial rules).

My opinion:
[*]Pay down the CC debt as soon as possible.
[*]If you have an emergency, you would then have available credit on the CC.
[*]Keep just enough so that you are comfortable that there will be no bounced checks. Keep in mind that you also want to avoid bank fees for having less than the minimum balance in checking/savings (not all accounts have minimum balances). For me personally, $500 buffer over the minimum balance is plenty. You may be different though.
[*]As soon as the CC debt is gone, then consider saving for the emergency fund of 3-6 months salary (so you never need to rely on the CC again).
[*]Also consider retirement accounts. If your employer matches your retirement savings, it is stupid to turn away this free money.

 

[GasX]

Originally posted by: arcenite

Originally posted by: Jumpem
It's common knowledge that you should have enough money saved to cover 3-6 months of living expenses.

But if you have $15k of CC/short term debt does it make sense to keep more than a couple thousand saved? It seems to me you would be better off putting the extra money towards getting rid of the debt instead of putting in your emergency fund.

Opinions?

No it does not make sense. You are losing more interest on your debt than you are gaining on the money you have saved (assuming you are talking about a checking/savings account)

And if he lost his job tomorrow, he would not be able to pay his bills.

 

[piasabird]

You should get some money back on your taxes for buying a house, plus the Interest and the closing costs. Especially if this is a first house. That can be spent on furniture also. Dont go off the deep end too soon. You may need new windows or a roof or a water heater. Painting a house before moving in is best.

 

[akubi]

Originally posted by: Mwilding

Originally posted by: arcenite

Originally posted by: Jumpem
It's common knowledge that you should have enough money saved to cover 3-6 months of living expenses.

But if you have $15k of CC/short term debt does it make sense to keep more than a couple thousand saved? It seems to me you would be better off putting the extra money towards getting rid of the debt instead of putting in your emergency fund.

Opinions?

No it does not make sense. You are losing more interest on your debt than you are gaining on the money you have saved (assuming you are talking about a checking/savings account)

And if he lost his job tomorrow, he would not be able to pay his bills.

charge it on the credit cards then... he'd be back to square one, but at least he saved some interest in between.

 

[Engineer]

Originally posted by: dullard
The 3-6 months is ideal for the average person. The average person does not have $15k in CC debt (over half pay in full each month, and for the majority who do carry a balance it is quite small). Thus the 3-6 months rule doesn't apply to you. Too many people remember rules but they forget about the assumptions the rules need to be valid (this applies throghout life not just financial rules).

My opinion:
[*]Pay down the CC debt as soon as possible.
[*]If you have an emergency, you would then have available credit on the CC.
[*]Keep just enough so that you are comfortable that there will be no bounced checks. Keep in mind that you also want to avoid bank fees for having less than the minimum balance in checking/savings (not all accounts have minimum balances). For me personally, $500 buffer over the minimum balance is plenty. You may be different though.
[*]As soon as the CC debt is gone, then consider saving for the emergency fund of 3-6 months salary (so you never need to rely on the CC again).
[*]Also consider retirement accounts. If your employer matches your retirement savings, it is stupid to turn away this free money.

Good point. I am now swayed completely (didn't take much) to the pay off the CC side.