[Mizelenius]

Since we bought a house (in Nov.) we have accumulated cc debt (which we did not have before

).

We put money into savings every month. If we continue doing that, it will take us FORTY months to pay off the debt and 20 if we put that savings money to pay off the cc debt. Our cc is 0% interest (for this year).

I am going to try to get extra money to pay off the cc debt (and we are putting any extra money towards it now, too), but I have to assume (to be safe) that I won't-- I don't want to count on it.

HOWEVER, our savings is not significant. If we had a big emergency (like if DH lost his job) it would be wiped out fast.

So, would it be smarter to build up the savings and pay off the cc slowly or just get rid of the cc debt ASAP?

 

[Ruthiegirl]

Well, I am a Dave Ramsey fan so I'll quote what he says. Put $1000 into an emergency fund. This is the money you don't touch unless there is a dire emergnecy -- your muffler falls off, you need a root canal, your kid breaks a leg and you have to cover the ER copay, etc.

All other extra money, and he really means every stinkin dime you can scrounge, goes to pay off the credit card debt. The goal is to get it paid off and then not use it anymore.

You can also think about it this way: rarely does the interest earned on a savings account exceed the interest on a credit card. I realize that you have a 0% interest account right now, but that will not last and then you will be it with big finance charges. Imagine, if you pay off the balance before the grace period is up, you will be free of all credit debt and can move on without that monkey hanging around your neck.

Then, you can dump money into your savings. We are working this plan right now and it has been awesome for us.

 

[Stone Fence]

an emergency fund of $1000, then pay off those CC as fast as possible. If you can, read "The Total Money Makover" by Dave Ramsey. He's really good about explaining his method (it works).

Hopefully Selu will check in and answer your question better than me.

 

[Stone Fence]

Too funny. I don't type very fast!

 

[Mizelenius]

We have over $1000 so that answers my question!

Thanks!!

We never touch the savings, either!

 

[Ruthiegirl]

Quote:

Originally Posted by Stone Fence Too funny. I don't type very fast!

Oh gosh, that was funny. I checked out your blog. What a beautiful place you have. And such an inspiring mountain view. Just lovely.

 

[velochic]

I would pay down the debt first. If you think about it, $1000 isn't really much of an emergency fund. An emergency fund is 4 - 6 months of income. Especially since you own (through mortgage) a home, I would get those cc's paid off as fast as possible. You are LOSING money.

A typical (taxable) money market mutual fund is earning at least 4% right now. That's the BEST you'll do to invest your money in cash. Your cc's interest rate is much higher, I would assume. A HELOC (home equity line of credit) would be less than your cc interest rate. In the case of an emergency, you're better off borrowing from HELOC than to still be paying on your credit cards.

Bottom line, pay off the credit cards first, then work on building a serious emergency fund asap.

 

[Mizelenius]

Quote:

Originally Posted by velochic Your cc's interest rate is much higher, I would assume.

Nope, as I said in my OP it's 0%. Granted, we are losing money because we can't invest it (have to put it to the debt).

 

[velochic]

Quote:

Originally Posted by Mizelenius Our cc is 0% interest (for this year).

What is it after that? And can you pay it off in the next 3 cycles (before the end of the year?) If it's above 3%, you need to pay it off.

 

[Mom2Wilmo]

I agree with pp in putting everything after emergency stash to pay off cc debt. It worked for us.

 

[avendesora]

Generally speaking, credit card interest is higher than the savings, so the general rule would be to pay off the credit card first. However, since your interest rate is 0%, I would say it's really up to you.

Mathematically speaking, the best plan would be to continue to make the minimum payments on the credit card, and save everything you can in a secure (not stockmarket related) savings account with a good yield. Then, just before the 0% deal runs out, pay everything from your savings (except leaving yourself with $1000, maybe) towards your credit card so they won't hit you with too much interest.

Other than that, I'd say it's the psychology of the issue. Which inspires you more? Are you more hesitant to spend money that would otherwise go towards savings? Are you more hesitant to spend money that could help pay off your credit card?

Once the 0% deal is off, that's when you really need to worry about this. Start looking into a HELOC now, so that you can have it lined up before the interest hits. If the interest rate on your cc is really high, I'd even consider skipping the $1000 thing, just pay your cc down as much as possible. That works if you're really disciplined enough to only use your credit card for super-emergencies only, since you won't have anything else to help float you.

My real point: It's your call. Consider what inspires you, consider what tempts you, consider how disciplined you are. (We use our credit card all the time, but I consider myself very disciplined, and as we never carry a balance, we never pay interest.)

I'm glad you're being motivated about this. As I said, I consider myself disciplined, and well organized as well. However, when we bought our house, we had a few months of credit card interest as well. I had planned all the closing costs, fees, moving expenses... but I hadn't thought of a lot of things, like that we would need a lawn mower! So we had some debt, but we worked our way out, and we're doing fine.

I now have three months of living expenses saved up, and I think that's a reasonable amount.

Congratulations on your new home!

Aven

 

[Mizelenius]

Quote:

Originally Posted by avendesora Other than that, I'd say it's the psychology of the issue. Which inspires you more? Are you more hesitant to spend money that would otherwise go towards savings? Are you more hesitant to spend money that could help pay off your credit card?

Well, debt really stresses me out. So, my instinct is to get the stupid card paid off. At this point, we are getting offer after offer for 0% interest for a year . . .I don't know if those offers will exist later, but so far they've been easy to get. The rate increase isn't horrible (at this point it's about 9.99). We also have a card with a fixed rate of 7% that we keep since it's fixed.

DH, however, feels OK with debt. So, that is one of the conflicts. He wants to keep putting money into savings. However, I have tried to show him that once the debt is gone, ALL the "extra" money is completely ours. He's had his turn with money, though, and now it is mine. So, I think I will just try to get rid of that debt. I want to be one of those people who has NO debt again, even no mortgage (although I know people say it's good to have a mortgage). Once I go back to work (which will be a long time, now that we're having a 3rd child) I want to use my salary to pay off the house. If all stays the same (no one gets sick/can't work/laid off) then we can pay off the house in 6 years (once I go back).

So, my plan will be to pay off the cc debt, and then seriously work on getting the 4-6 month emergency fund. I'd sleep much better if we had that!

Thanks, mamas!

 

[p.s]

I agree with Velochic to pay off the credit card first, b/c my way of thinking is take care of debts first and then work on goals (like rainy day fund, then savings account, then retirement, then kids' education). Even if for now the interest rate is 0%.

To me any debt is a yoke. Alot of this compulsion was ingrained into me by my parents, but I also figure, once the debt is paid, you don't have to worry about it. Worry takes time and energy. I used to take advantage of all the freebie offers sent to my mailbox, like open this credit card and get $50 gift certificate the first time you charge, or 10,000 FF miles. It got too confusing to balance it all, esp with a demanding work schedule.

My suspicion is that if you don't pay it off in a year, then the finance charges are even more astronomical and usurous than usual, and if you hadn't paid it off, where would that money come from? Also, as PP stated, how much is your credit card debt (theoretical question, answer in your head), and what is that compared to $1000? Even if you plunked that $1000 into a MM account (and then best rates for $1000 are what?), what would be the profit at the end of a year? Maybe $50 at the very best?

 

[Stone Fence]

Home Equity Line of Credit. It's a bad idea. It's risking your house for whatever you originally used the credit card for.

The $1000 emergency fund is not a fully funded emergency fund. It's there to keep the little stuff at bay (cavity that needs filling, car repair, plumbing problem, etc.) so you don't use the credit card again.

Once the debt is paid then you can save up the big emergency fund (4-6 months of expenses).

Your DH should read Dave Ramsey (or listen to him, he has a radio show). It may make him uncomfortable with debt. Then you'd both be on the same page.

 

[Stone Fence]

Quote:

Originally Posted by Ruthiegirl Oh gosh, that was funny. I checked out your blog. What a beautiful place you have. And such an inspiring mountain view. Just lovely.

Thanks for the compliment! We love our place.

 

[velochic]

Quote:

Originally Posted by Stone Fence Home Equity Line of Credit. It's a bad idea. It's risking your house for whatever you originally used the credit card for.

For the record, (not sure if this was in reply to my post), I never said to pay off credit cards with HELOC. I said that in a pinch, you can use HELOC as the emergency fund.

1000 bucks is not an emergency fund. And for things like a dentist appointment, ideally, your buget would be set up such that for something like that, you pay for the dentist INSTEAD of putting money into savings. Emergency funds are for things like totalling your car and paying the difference that the insurance doesn't pay or the death of a family member that you have to fly to deal with. For the smaller things, it's better to have your budget set up to ABSORB these costs on a monthly basis, because... let's face it... they pop up EVERY SINGLE STINKING MONTH!! If it's not teeth, it's the kids tearing out the soles of their shoes, it's a new tire for the car, it's a new mailbox, it's a broken bone, it's replacing a dining room chair. That is not what an emergency fund is for. That is what smart budgeting is for. I don't listen to this Dave Ramsey guy 'cause we have no debt, but I'd bet he'd agree with me.

 

[Stone Fence]

But a HELOC is a bad idea as an emergency fund. It would have to be EXTREME circumstances. $1000 is to keep Murphy at bay(the guy of Murphy's Law). The $1000 is temporary. Once debt is paid off then you save the fully funded emergency fund (4-6 months expenses).

Dave Ramsey works with a budget but, he also works with people that are really in over their heads. Having the $1000 emergency fund, while paying off debt, gives people the peace they need to work at the debt and not aquire more debt.

 

[Mizelenius]

Quote:

Originally Posted by velochic , ideally, your buget would be set up such that for something like that, you pay for the dentist INSTEAD of putting money into savings.

That is what I am trying to work at now. We don't touch savings, but those little emergencies have been going on the cc instead-- while DH insists on putting money into savings?? Well, DUH (to us), because that means we are living beyond our means-- as you said, they happen every darn month.

So, we DO have room in our budget for those little emergencies as long as we are SUPER careful. Until recently, we weren't super careful. We weren't extravagant, but every little thing adds up, esp. since we don't have a lot extra. So now, when it's truly something extra, we just don't get it. It's back to the basics time!

And OMG, this is my 3500th post!!!!!!!!!!!!!!!!!!

Oh, and Amy, I've admired your place before! It's fantastic!!!!!

 

[cchrissyy]

put it into savings as long as the CC is at 0%, and then the month it will end, pay it off!
(or, get a new 0% card at that time. But no sense paying it down until then, as long as the money IS being saved somewhere for that day!)

 

[Mizelenius]

Quote:

Originally Posted by cchrissyy put it into savings as long as the CC is at 0%, and then the month it will end, pay it off! (or, get a new 0% card at that time. But no sense paying it down until then, as long as the money IS being saved somewhere for that day!)

I hadn't even thought of doing it that way!