Savings or pay off debt? - Mothering Forums

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#1 of 13 Old 01-06-2014, 10:56 AM - Thread Starter
 
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Which is smarter in my situation?

 

I should be getting a fairly large (for me) tax return. I am going to use some for necessary expenses (i.e. catching up on life after having no money for a long time!)  I'm definitely going to put at least $1000 in savings for an emergency fund, but I'm not sure whether it is smarter to put the rest towards debts or keep most of it for savings.  I'm a very low income, self employed, single mom of 2, and my credit is terrible already for a variety of reasons. 

 

I know I need to work on my debts to start to heal my credit, but I also think I'd feel better knowing I had a larger cushion should anything happen (car issues, job, medical, etc.) 

 

Once I am caught up on bills using some of the tax return money, I do make enough per month to stay current if I'm careful...and maybe squeak out a tiny bit of savings, but that is unlikely unless I am able to increase my income (which is somewhat possible at this point).  So could theoretically start the debt snowball plan after getting current and setting aside the savings-it just seems like it will take forever!

 

 

Thoughts? What would you do/have you done?


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#2 of 13 Old 01-06-2014, 11:26 AM
 
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I would do as you posted..

 

- keep $1000 for emergency fund

- a small amount for necessary expenses (catching up on life fund)

- rest towards debt - esp. the one with the highest interest

 

Along with this,

I'd also add a small portion towards emergency funds every month...even if its only $20 that I can spare. 

And I'd add some monthly money to go towards debts, besides paying bills. 

 

Can you find out if you can transfer your high interest debt to a low interest plan? IF you have any student loans, maybe you can look into if they can be reduced or waived? 


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#3 of 13 Old 01-06-2014, 12:01 PM
 
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Good question! Can you put some towards savings and some towards your debt? I would think since you are self-employed and low income, an emergency fund would be really important for you. It could prevent future debt. Suze Orman recommends a fund with 8 months of living expenses due to the recent economic problems. It would also be good to pay some towards your highest interest rate debt to start chipping away at it. It may not feel like much but over time you will see progress. I have been saving and paying off debt at the same time focusing on whatever seems most important at the time. When I get a windfall, like a tax return, I will try to pay off a bill and save a chunk. For example, I had a credit card with about $1700 on it so I paid it off because it feels like a big accomplishment and that's motivating. I put the rest in savings. I don't have 8 months yet, but I'm working on it. Since I paid off that one credit card, I now have extra to send to the other credit card. Good luck!
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#4 of 13 Old 01-08-2014, 07:10 PM
 
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If I were self employed single parent, I would definitely feel "safer" with money in the bank and carrying debt, rather than carrying no debt but $0 to only $1000 in my account. Debt payments can always be re-negotiated/extended, but you can't just borrow thousands in a flash to cover emergency expenses.  I would save all the money (minus the catching up on life fund) and continue paying the debt down as is.

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#5 of 13 Old 01-08-2014, 07:55 PM - Thread Starter
 
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Thanks all!

 

After some more thought, I think I'm going to put the bulk of it in savings.  Since my credit is so bad, I have no way to borrow money if something major happened, so I'll just feel better knowing that I have a cushion.  It's been a stressful few months financially since I moved out of ex's house and I have really been barely scraping by-I'm looking forward way too much to having some money in the bank again-now the challenge of keeping it there!

 

I think I will pay off my one small credit card that is still open-I originally got it to start improving my credit and then immediately filled it up, so I might try using it for gas and paying it off every month to teach myself better habits!

 

All my other debt is fairly old on closed cards, plus a medical bill.  No student loans.  I'm going to try to negotiate a lower interest rate again on my larger card-they did it for me last year, but only for a year, and I don't know if that is a one time deal or not. 

 

I don't have a ton of debt compared to a lot of people, but it's a lot in ratio to my yearly income.  Once I can consistently pay all my bills on my monthly income, I will worry about the debt and my credit rating more.  


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#6 of 13 Old 01-08-2014, 08:03 PM
 
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FWIW, I think you've made a pretty wise choice, especially considering that you can't just pile emergency expenses onto a new credit card (not that that's really a good option, but you know what I'm saying).

 

I would call and try to re-negotiate the rate/payment plan again. 

 

Best of luck mama. You're going to do great! :)

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#7 of 13 Old 01-09-2014, 07:44 PM
 
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How likely are you to put it in savings and keep it there?

That would be the question I ask myself first. If I am unlikely to not keep it there and just end up absorbing it into my spending, or using that savings as my own personal "credit" extention then I would pay down debt.

Be honest with yourself. Why did your credit card that you got to heal your credit end up just being quickly filed up? Was it on wants? Needs? a mix of both?

If you tend to do spontaneous spending...is there a savings account you can out it into that doesn't allow you to instantly take it out?

Our savings are in an ING account. Higher interest rate and also takes a day  or two to transfer funds in order to use them. This REALLY helps us to not spontaneously spend our savings. We have to go online and make a transfer and then wait 1-2 business days for funds to show up in our account.


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#8 of 13 Old 01-10-2014, 12:31 PM
 
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I have an ING account for that very reason. They got bought out by Capital One Bank. The website is Capital One 360.
https://home.capitalone360.com/?isBus=false&customerType=1



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#9 of 13 Old 01-17-2014, 09:02 PM
 
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I second setting up a separate account with higher interest rate that is a bit harder to access the savings.   If you have access to emergency funds from family, then I would be inclined to focus on paying down the debt and restoring credit rating.  If you have no other supports financially for emergencies, then I would personally want a better cushion....much more than $1000 - more like the equivalent of 6-8 months of basic survival living expenses.  And ensure that the health insurance premium remains payable.

 

Definitely try to negotiate better rates and consoldate the debts as soon as possible.  Every so often I used to get 0% balance transfer credit card offers (with a percentage flat rate for balance transfer).  But only do this if you are super organized and know that you will get the debt paid down before the expiry date of the low interest rate.  And read the fine print!  Once I started asking, I was amazed at how many banks would give me a lower interest rate on credit cards.  I'd just say, "Hey I have a couple other credit cards but am hoping you can offer a better rate.  I'm considering a balance transfer.  Can you offer me 1.9% interest rate for 8 months?"  (but I would be okay with 3.9 for 6 months, kwim?)

 

I track every single cent that I spend, and every cent that comes in using an i-phone app called Cash Trails.  It is so so so awesome....because I get the instant gratification of seeing exactly where all the money is going.  It's quick to use on the spot if paying cash and not getting a receipt.  But otherwise, I get a receipt, tuck it in my wallet and at the end of the day I enter it into the app.  I can see right away if I have spent too much on things I really can do without.  It builds a new level of consciousness into every single expenditure.....cuz I know I have to plug that number, no matter how small, into the app.  There are probably other similar  (or better?) apps out there too.  

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#10 of 13 Old 02-05-2014, 03:46 AM
 
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That app sounds neat. I use the No Spend Challenge here for that LOL. I record purchases into a small journal in my purse to keep track of it. It makes me much more aware of purchases and spending when I know I have to track it and... come here to shame myself in front of the nice ladies in the thread. :lol

 

OP I would definitely go for more savings in your situation. Depending on tiny details some things might could be done but overall having the savings there is a better back up than trying to remedy credit if it's shot. Bad credit can take a while to fix and getting new credit if needed would be difficult and not a great idea anyways. I'd say what's done is done... leave the debt for now and get a cushion. Hopefully you'll be able to start tackling that debt sooner rather than later. 


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#11 of 13 Old 02-07-2014, 01:36 PM - Thread Starter
 
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Quote:
Originally Posted by colsxjack View Post
 

How likely are you to put it in savings and keep it there?

That would be the question I ask myself first. If I am unlikely to not keep it there and just end up absorbing it into my spending, or using that savings as my own personal "credit" extention then I would pay down debt.

Be honest with yourself. Why did your credit card that you got to heal your credit end up just being quickly filed up? Was it on wants? Needs? a mix of both?

If you tend to do spontaneous spending...is there a savings account you can out it into that doesn't allow you to instantly take it out?

Our savings are in an ING account. Higher interest rate and also takes a day  or two to transfer funds in order to use them. This REALLY helps us to not spontaneously spend our savings. We have to go online and make a transfer and then wait 1-2 business days for funds to show up in our account.

 

Quote:
Originally Posted by colsxjack View Post

 

Be honest with yourself. Why did your credit card that you got to heal your credit end up just being quickly filed up? Was it on wants? Needs? a mix of both?

If you tend to do spontaneous spending...is there a savings account you can out it into that doesn't allow you to instantly take it out?

 

Good questions.  Most of my debts are fairly old, but the newer ones were needs-money was a big issue between ex and I, and it got to the point where I was more willing to charge it than I was to ask him for money, for various reasons.  Plus with moving expenses and getting started on my own, it built up again.  Sigh. 

 

I am going to ask the bank to unlink my checking and savings account, so that I'll have to physically go into the bank to withdraw money.  I'm not terrible with money, but I definitely can fall into the "10 dollars here, 20 dollars there" trap and spend too much.  I'm going to try the envelope system- I think that will work really well for me since I do much better with cash spending versus using a card and balancing the account. 

 

I'm just waiting for the refund now, making a list of needs, plus a couple of wants. Looking forward to having the security of a little money in the bank!


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#12 of 13 Old 02-07-2014, 01:43 PM - Thread Starter
 
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AG-I do have some access to emergency $$ help from my parents, but they are not at all wealthy either, so it would need to be a true emergency and they certainly couldn't pay my rent or expenses for months. They have been great about helping out with the kids classes and helping me get started in the new house, but I don't like to ask them for money if possible.  If things really fall apart, the kids and I would be welcome to move in with them though, which I know I am lucky to have as an option. 

 

As much as I never want to rely on credit again, it is scary to know that it is not an option right now.  I really do want to improve my credit so that I can buy a house some day (way off in the future!), but I am feeling like I need the savings first, then I can concentrate on stabilizing my income and expenses so that I can make my payments on time every month.  I've run into a few larger unexpected expenses that I've had to pay out of my monthly budget, which then make me late on other things, which could have been prevented if I had a little extra set by!


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#13 of 13 Old 02-08-2014, 06:16 PM
 
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I'm kind of in the same boat - access to emergency money but they don't really have much.  It's comforting somewhat and I am grateful I have that.

 

If you know you do better with a cash/envelope system then go for it!  There's a TV show called 'Till Debt Do Us Part' (a reality show about couples that get in over their heads in debt and this hilarious, bossy SuperNanny-type woman who is a financial planner comes in and does this financing boot camp with them.  I actually learned a bit from it a few years ago when I had time to watch a bit of TV, lol.   She recommends cash only and would have them physically cut up their credit cards.   I also read a book once called 'smart couples finish rich' and I think they have a version written for women.  Or another one I read was called 'your money or your life'....and I liked it a lot - the authors were Wall Street-turned-crunchy humanitarians and it was an inspiring read that tried to reframe perceptions around spending...calling it spending your time and life energy as opposed to just spending money (since it takes time and effort to earn every cent).

 

I would probably still attack the debt first (since you do have that small emergency cushion via parents), and debts always have higher interest rates than savings accounts.  Getting in to a positive net worth situation is liberating, and emotionally takes a weight off the shoulders too.

 

Good luck!  In a couple years time you will feel accomplishment when you look back at how far you came :-)

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