Would you save or pay off debt? Help me decide!

[becoming]

Put yourself in this situation:

Until recently, you & your DP have been living pretty paycheck-to-paycheck, having about $200-400 left over in between paychecks but not living nearly as frugally as you could (eating out 2-3 times a week, buying unnecessary things here and there, etc.). You also had a *lot* of bills -- around $3500/month in bills, with bring-home pay of around $5000/month.

Now DP has gotten a promotion with a significant raise, and you've had a couple of windfalls of unexpected money that have allowed you to pay off some debt. Now your bring-home pay is more like $5800/month, and your bills are down to around $2700/month.

You come into another unexpected sum of money (let's say $1500 extra). Would you pay off a student loan (balance = $700, payment $50/month) and a credit card (balance = $700, payment $40/month), or would you save the money so that you can have more breathing room?

Keep in mind that you have no savings whatsoever in this scenario.

While I know the responsible thing would be to pay off the two debts, we have been paycheck-to-paycheck for so long that I love the idea of having $1500-2000 extra in our checking account just so we can feel more comfortable. So I need your help -- WWYD?

[Matt's Mom in MT]

Pay off the bills. And it seems to me that with what your bringing in vs what your bills are, you should be able to save monthly.

[MissAnnThrope]

For me I'd pay of the one with the higher rate and make larger payments on the other. This way I can keep a little bit of money in my savings to fall back on just in case. Also if you are wanting to stop yourself from spending money and want long term I'd go for a money market or mutual fund. They have higher interest rates so your money starts making money. Once you pay off one bill you can use the money that you would use on it monthly on another bill to pay it down or off.

I also like taking my money putting it in savings letting it build up with interest and then paying something off if there is not any interest building on the debt.

If you make a budget and put money into the savings every month/week at the same time... maybe on a automatic draft you will not be tempted to spend it.

Lucky you to have more money coming in and less going out. This is a great time for you to start looking for the long term.

[mightymoo]

I would probably pay off the debts because they are so small in relation to the amount of wiggle room you have every month that it won't take long to save up that much again. But I think it would be okay to have the $1500 as cushion and pay the debts with the remainder for the next couple months if that is what feels best to you. If you aren't already doing it, I recommend at least a simple expense tracking plan where you keep track of what you take in and what you spend, mine gets more complicated as I grow it to fit my needs, but I also like to have an annual budget to plan for things that only happen once a year, so that months when a lot of those things happen at once aren't too tight, but you also need that cushion in savings to be able to do that too.

But I would recommend you sit down and write out a plan for the future. Work out goals for how much cushion you want in your checking account, emergency fund, retirement, college educations, then you can fund each goal in the priority order you determine.

[Benji'sMom]

Keeping the $1500 in your checking account isn't the same thing as saving it. If you're just going to keep it in the checking account (and end up spending it) you might as well spend it to pay your bills.

[lisalulu]

If it were me, I would pay off the bills. If I didn't do that, it would be put into a CD or something I couldn't touch-definitely not the checking account or I would end up chipping away at it unintentionally. But given the numbers you gave of 5800 income and 2700 of bills, you could easily put away a big chunk of money away "just in case" in just one month on top of paying the two bills with the extra 1500 or am I misunderstanding?

[becoming]

Originally Posted by lisalulu

But given the numbers you gave of 5800 income and 2700 of bills, you could easily put away a big chunk of money away "just in case" in just one month on top of paying the two bills with the extra 1500 or am I misunderstanding?

Well, the deal is, I don't think I'm really wrapping my brain around how much extra we're going to have now compared to what we've had in the past. DH's raise just took effect two weeks ago, so we haven't really seen the "big picture" yet as to how much money we're going to have left over. I think I'm scared to let this money go just because I know how it's been in the past and haven't actually seen the results of the raise and the fewer bills yet.

[Crunchy*VT*Mom]

I would pay off the debt because in our checking account that money would disappear.

[kerc]

Originally Posted by Crunchy*VT*Mom

I would pay off the debt because in our checking account that money would disappear.

yes yes yes.

I'd also consider using 1/2 to pay down debt and 1/2 to save.

[momto l&a]

I would pay off debt. That way each month youll will have, whatever you where paying on debt, free to use or save.

[CaraNicole]

get rid of the debt...that would be breathing room for sure!

[polyhymnia]

What's the rate on the debt? You can stick that $1500 in a high interest savings account (HSBC for example) at about 5%. If your loans are lower than that, I would save. If not, I would pay down half of each loan and save half of the money (really SAVE it, in a high interest savings account - not in a no/low interest checking account).

[scrapadoozer]

Originally Posted by crayolaab

What's the rate on the debt? You can stick that $1500 in a high interest savings account (HSBC for example) at about 5%. If your loans are lower than that, I would save. If not, I would pay down half of each loan and save half of the money (really SAVE it, in a high interest savings account - not in a no/low interest checking account).

:

[Knittin' in the Shade]

I would defintiely pay off the credit card, becuase that intrest rate is probably way higher than anythign you'd make in an interest bearing account. In the student loan, I'd venture to guess that your interest you'd earn is higher than the interest you payon the loan, so I'd jsut make big payments on it but not necessarily pay it off.

[Denvergirlie]

Save $1K of it as an emergency fund. I really like ING online accounts. It takes a few days to get it out, but still is accessable enough to address an emergency.

Pay debt with the rest

[MorganRiley]

pay off the debt completely

that in itself will be a burden lifted from your shoulders

[kristia]

I agree with denvergirlie. If you don't have an emergency savings, then you might want to consider setting aside $1000 for true emergencies, ie car or house issues. The balance should be put towards the debt and it sounds like you have some wiggle room in your spending. Work out a budget with your partner and PAY DOWN THAT DEBT!!!!!

[kofduke]

Honestly, I'd pay off the debt just because I wouldn't want it hanging over my head, and I think about debt all the time. Particularly CC debt. Then for 3 months or so I'd try and save all the extra new income, and then after you have that cushion you can figure out what it is you want to do with your extra money.

Congrats on the raise!

[EmsMom]

I think that I would pay off the $700 credit card, stash the rest as the beginning of my emergency fund. Continue to add that credit card payment (was it $40 a month?) to the emergency fund every month with an automatic withdrawal. The emergency fund I would have as a money market account with check writing and the highest interest rate I could get or a savings account with a high interest rate. I would NOT leave it in my checking account until I developed more frugal habits! When I was new to this and saw an extra thousand or so in the checking account I would spend it! Now I just automatically subtract the $1000 cushion from what I see in the balance and totally ignore it. It would be great to set up an automatic deduction from your checking account to go right into the emergency fund. then target any other interest paying debt and add a bit to whatever you were paying. Student loan interest is not usually that high, so maybe pay it last, but just pay the highest interest debts off first with that extra income. Whatever you do, try not to let the raise just get used up. If you were living adequately on what you made before, then just ignore the raise and keep on doing it while either paying down debt or creating an emergency fund. And don't forget to fund your retirement accounts!

[lisalulu]

Originally Posted by becoming

Well, the deal is, I don't think I'm really wrapping my brain around how much extra we're going to have now compared to what we've had in the past. DH's raise just took effect two weeks ago, so we haven't really seen the "big picture" yet as to how much money we're going to have left over. I think I'm scared to let this money go just because I know how it's been in the past and haven't actually seen the results of the raise and the fewer bills yet.

Oh I see. So maybe if it makes you feel better you could save the 1500 and just pay those two bills out of your extra next month? I have a hard time parting with big chunks of money too