Author Topic: Empty savings to pay debt?  (Read 11096 times)

layzbones

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Empty savings to pay debt?
« on: February 27, 2013, 10:57:15 AM »
I know this has probably been asked a lot but just wanted a bit of confirmation.  Really 2 questions

I'm hacking away at about $2600 of bad CC debt at 15% interest.  I'm currently putting about $800-900 a month towards it just to get kill it quick.

I have $2000 in my savings account just sitting there (haven't been saving while trying to pay down debt).

1) Should I kill the CC debt instantly by using the $2k in savings and rely on my other (unused) lines of credit if an emergency comes up?  With the debt gone I can start piling up about $1000-$1200 / mo. in savings so I'd only really be at risk w/ little/no savings for a few months... are there things that can happen where a line of credit won't help in my time of need?

2) I also have $4600 on CC with 0% interest for 2 years - what's the best way to go about paying this down? stretch it out over the two years and start building my stash hardcore or try to kill it as fast as possible to get it out of my life?  I don't know if I want to go for two more years saying that I have CC debt, even if it's no interest....

Thanks in advance - I feel like I know the logical things to do but my past has me doubting myself here...

The Taminator

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Re: Empty savings to pay debt?
« Reply #1 on: February 27, 2013, 11:17:55 AM »
Personally I would drain the savings to kill the debt. But my job is pretty secure and I could reasonably expect to get EI if I lost my job. As for the 0% interest, I would save/invest then kill that one off just before it comes due.

The only way I can think that a LOC won't work in an emergency is if you need a large sum of cash before the money can be transferred from your LOC to you bank account.

You really have to make sure that this decision fits your life situation though.

Use it up, wear it out...

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Re: Empty savings to pay debt?
« Reply #2 on: February 27, 2013, 11:19:04 AM »
I say - kill the debt. Keep the credit cards (preferably with $0 balance) until you've built up a stash.

Mathematically, it makes no sense to pay 15% on $2K for the privilege of paying a hypothetical future bill with cash instead of credit.

sherr

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Re: Empty savings to pay debt?
« Reply #3 on: February 27, 2013, 11:22:58 AM »
1) Should I kill the CC debt instantly by using the $2k in savings and rely on my other (unused) lines of credit if an emergency comes up?  With the debt gone I can start piling up about $1000-$1200 / mo. in savings so I'd only really be at risk w/ little/no savings for a few months... are there things that can happen where a line of credit won't help in my time of need?

Yes absolutely. I would at least. Ask youself, if you had $0 in savings and the same credit card debt and you had $2k to put towards something, what would it be? If it were me I would absolutely pay down the 15% interest debt before building a close-to-0% savings account. If an emergency does happen then the worst case-scenario is that your credit card debt would go back up, but you won't be paying interest on the debt between now and whenever the emergency happens so you'll still come out ahead that way anyway. I can't think of any emergency situation where a savings account would help but a credit card wouldn't, most people are happy to take your money however you can give it to them.

Savings accounts may make sense once you are debt-free to keep you from having to cash out of investments while the market is down, but as long as you have bad credit card debt you should pay that off first. You may be able to consider using springy low-interest debt instead of a savings account for you emergency fund in that situation too. See: http://www.mrmoneymustache.com/2011/04/22/springy-debt-instead-of-a-cash-cushion/

2) I also have $4600 on CC with 0% interest for 2 years - what's the best way to go about paying this down? stretch it out over the two years and start building my stash hardcore or try to kill it as fast as possible to get it out of my life?  I don't know if I want to go for two more years saying that I have CC debt, even if it's no interest....

This one is more of a toss-up. The mathematically correct answer is to put your money in some kind of interest-bearing investment for a couple of years, and then pay off the CC before the interest kicks back in. However two years is a pretty short investment horizon so you won't have a ton of time to let the interest compound anyway. It may be better for you psychologically to just pay it off sooner. Either way you win.

Mrs MM

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Re: Empty savings to pay debt?
« Reply #4 on: February 27, 2013, 11:36:16 AM »
Yes, I would definitely use the savings to kill the debt.  Get it done with already!!  How long has that $2K been sitting around?  Do you expect an emergency?

layzbones

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Re: Empty savings to pay debt?
« Reply #5 on: February 27, 2013, 12:24:27 PM »
Well I think it's time to end it for good - thanks for the advice/confirmation!

Yes, I would definitely use the savings to kill the debt.  Get it done with already!!  How long has that $2K been sitting around?  Do you expect an emergency?

It's been revolving... I'd pay it down but then buy something stupid.  Really stupid usually.  But those times are in the not so distant past.

On the 0% debt - I may just split the different, and maybe aim to knock it out in a year or so... I'd like to start putting enough towards my student loan to take it from a 20 yr to a 10 yr.

marty998

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Re: Empty savings to pay debt?
« Reply #6 on: February 27, 2013, 01:58:58 PM »
Why do you have 2 credit cards? Why does anyone need 2 credit cards?

kill the 1st debt then cancel the card.
build your stache any way you choose and kill the second the day before interest kicks in

simple

icefr

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Re: Empty savings to pay debt?
« Reply #7 on: February 27, 2013, 02:18:01 PM »
2) I also have $4600 on CC with 0% interest for 2 years - what's the best way to go about paying this down? stretch it out over the two years and start building my stash hardcore or try to kill it as fast as possible to get it out of my life?  I don't know if I want to go for two more years saying that I have CC debt, even if it's no interest....

This one is more of a toss-up. The mathematically correct answer is to put your money in some kind of interest-bearing investment for a couple of years, and then pay off the CC before the interest kicks back in. However two years is a pretty short investment horizon so you won't have a ton of time to let the interest compound anyway. It may be better for you psychologically to just pay it off sooner. Either way you win.

I would consider putting $1-2k in a savings account once you've paid off the first debt and THEN starting on this one just to get rid of it. If you're throwing $900 at your debt each month, that's:

by month:
1) $600 to first debt, $300 to savings
2) $900 to savings
3) $900 to savings
4,5,6,7,8 months: $900 to debt #2
9 months: $100 to debt #2, $800 is all yours!!

So you could be completely debt free in ~9 months! By the end of the year!

layzbones

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Re: Empty savings to pay debt?
« Reply #8 on: February 27, 2013, 02:42:47 PM »
Why do you have 2 credit cards? Why does anyone need 2 credit cards?

kill the 1st debt then cancel the card.
build your stache any way you choose and kill the second the day before interest kicks in

simple

The 0% one isn't technically a CC I guess, but I financed some big ticket items during the move into a new house.  It's not a card that I carry around or use.  All very anti-mustachian but I'm so pumped to get on the right track now.

Done by Forty

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Re: Empty savings to pay debt?
« Reply #9 on: February 27, 2013, 03:45:28 PM »
Why do you have 2 credit cards? Why does anyone need 2 credit cards?

Varying credit card rewards, sign up bonuses, having multiple lines of credit is often a gate for home loans.

Presuming that one pays off their balances every month, why not take advantage of multiple credit cards?

kisserofsinners

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Re: Empty savings to pay debt?
« Reply #10 on: February 27, 2013, 05:52:04 PM »
Well I think it's time to end it for good - thanks for the advice/confirmation!

Yes, I would definitely use the savings to kill the debt.  Get it done with already!!  How long has that $2K been sitting around?  Do you expect an emergency?

It's been revolving... I'd pay it down but then buy something stupid.  Really stupid usually.  But those times are in the not so distant past.

On the 0% debt - I may just split the different, and maybe aim to knock it out in a year or so... I'd like to start putting enough towards my student loan to take it from a 20 yr to a 10 yr.

It's always debatable and number zealots like t pretend human behavior is fully controllable. It is, but it also takes time and practice to do well.

I had the same problem for a long time. I couldn't lose the last $3k of my debt because "emergencies" would pop up and drive up the balance again and again. If you don't already have a good habit of actually saving money (debt paydown is not the same for this exercise) you need to start. Keeping a little trickle going into your "emergency savings" means you have somewhere else to tap when emergencies pop up other than the CC, "just one last time."

You may find that like me, You really needed to move things around even if it wasn't perfect by the numbers.
I wrote more about it here: http://www.mrmoneymustache.com/forum/welcome-to-the-forum/monkey-math/msg41570/#msg41570

layzbones

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Re: Empty savings to pay debt?
« Reply #11 on: February 27, 2013, 07:16:32 PM »

I couldn't lose the last $3k of my debt because "emergencies" would pop up and drive up the balance again and again.

Ah yes - this exactly.  My trouble was when I have a balance what's another drop in the bucket?  I've had the thing paid off before and when it's paid off it makes using it much more difficult.  That's another think that I think using my savings to just kill it for good will do.

I am very capable of saving, before I bought this house and in a matter of about 10 months saved up about $10k.  I was raised in a house where debt is perfectly acceptable and really just a way of life.  So even with that savings it still somehow felt acceptable to have a balance.  Don't ask me how haha.

I make good money for my area and age, and I hate that it's taken me this long to realize that I've got nothing really to show for it but stuff that isn't really even worth anything anymore.  Let the savings begin!

layzbones

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Re: Empty savings to pay debt?
« Reply #12 on: March 19, 2013, 10:55:00 AM »
So I payed off the first CC balance last night ($2500) after waiting to see if I would survive a round of layoffs at work - and I did!

So - now I've got a 0% $4200 balance on the last CC until Jan 2015.

I also have 2 student loans
1) $16,712 @ 3.75%, min payment of $113 will take it 16-17 more yrs to pay off (was a 20yr loan)
2) $12,339 @ 4.30%, min payment of $214 will take 6-7 more yrs to pay off (was a 10yr loan)

I have about $1100 of cash available per month for debt repayment ($1100 is after budgeting the $235/mo to the 0% card to have it paid off by 2015).

I also now have zero savings (aside from about $12k in my 401k) but do have the CC to fall back on only in emergencies ($5k avail credit).

So where is the best place to throw this extra $1100/mo?

-let the 0% interest loan ride out the next two years with $235/mo and hack away at the student loans?
-keep paying the minimum on the student loans and knock out the 0% debt in 4 months and then start on the loans?
-increase (maybe double the min payments?) on the student loans and start building up my savings again?

Once I knock out the CC balance - how do you determine how much is used to pay down the student loans vs savings?

Thanks in advance guys - and you were all right, it DOES feel so good to get that first chuck of debt out of my life for good!

innkeeper77

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Re: Empty savings to pay debt?
« Reply #13 on: March 19, 2013, 11:09:29 AM »
This is what I would do:

Pay the minimum on the 0% card to have it gone before it starts charging interest
Pay the minimum on the 3.75% loan until the other debt is gone
Put the rest of the money towards the 4.30% loan. (It is what is costing you the most money per dollar at the moment.)

Also, I would sell any useless things you happened to have on ebay,amazon, and craigslist, putting the proceeds directely into the loans. (Be careful about shipping costs!)

EDIT: I agree with Sherr below- do not put ALL money towards debt, as starting to invest can provide great returns on investment over time. I would still be aggressively paying down loans though. But keep some money aside, and invest as you see fit! You aren't in a terrible situation at all.
« Last Edit: March 19, 2013, 11:40:20 AM by innkeeper77 »

sherr

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Re: Empty savings to pay debt?
« Reply #14 on: March 19, 2013, 11:18:00 AM »
At this point it's probably better for you mathematically to leave the extra debt alone for now and invest in the stock market instead. However I also understand the wonderful feeling that comes from paying off a loan and never having to deal with it again. The value of getting there sooner is hard to define in monetary terms.

Either way you win. Invest and you win. Pay down debt and you win. It's much more a choose-your-own-adventure story at this point than one with a hard right and wrong answer.

Either way you should definitely plan  on paying off the remaining credit card on or before the date where the high interest will kick back in.

icefr

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Re: Empty savings to pay debt?
« Reply #15 on: March 19, 2013, 11:39:18 AM »
This is what I would do:

Pay the minimum on the 0% card to have it gone before it starts charging interest
Pay the minimum on the 3.75% loan until the other debt is gone
Put the rest of the money towards the 4.30% loan. (It is what is costing you the most money per dollar at the moment.)

Also, I would sell any useless things you happened to have on ebay,amazon, and craigslist, putting the proceeds directely into the loans. (Be careful about shipping costs!)

+1

It should take you about 13 months to pay off the 4.30% loan and then another 15 months to pay off the 3.75% loan.

Personally though - how much are you putting into retirement savings? I would probably consider putting $5.5k/year into a Roth IRA and anything to get your employer match before paying off the loans. Yes, they'll take longer to pay off, but the interest rate isn't high enough that I would give up the tax-advantaged room forever to pay it off faster.

layzbones

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Re: Empty savings to pay debt?
« Reply #16 on: March 19, 2013, 12:03:24 PM »
My company matches 5% for my 401k, I contribute the full 5% ($275ish each month) to take advantage of all the free money.  I've done this since starting with them 2+ years ago (they also throw in an extra 2% each year as well as an RSP).  It's 90% vanguard target retirement fund (2045) and 10% in company stock.  This is not factored into the $1100.  With all the matched funds and RSP contributions I've got about $12k and am going to let it ride.

So it sounds like the best thing to do it throw as much money at the student loans as possible until they're gone?  Even though doing so would prevent me from starting a baby stash as the foundation to some investments?  Should I just rely on open lines of credit in case of emergencies?

kisserofsinners

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Re: Empty savings to pay debt?
« Reply #17 on: March 19, 2013, 12:28:13 PM »
Congratulations on making a choice and doing it!!! It can be really easy to sit for months in "theorizing-landia"! Well done.

Should I just rely on open lines of credit in case of emergencies?

I'd stay away from this as you've already mentioned you've got issues here. Trickling a small amount of money into a savings account until the practice really takes hold isn't going to make or break you at this point. It's Win/Win as mentioned already. At this point it's about learning best practices for yourself.

Honestly:
Will using your credit for emergencies drive up the balances? Only you know
Is investing in stocks a good idea? If yes, how much? You won't know until you start having trouble sleeping.

It's all trial and error. Start will little amount of money while you're figuring it out and you've got less to loose. Play it too conservative and you've got nothing to win. You've gotta play to figure out what you're doing. No amount of advice from others will be an adequate substitution.

icefr

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Re: Empty savings to pay debt?
« Reply #18 on: March 19, 2013, 01:45:54 PM »
It's all trial and error. Start will little amount of money while you're figuring it out and you've got less to loose. Play it too conservative and you've got nothing to win. You've gotta play to figure out what you're doing. No amount of advice from others will be an adequate substitution.

Agreed! I'd consider using the first month's spare money after paying the minimums as a buffer, but if you would be tempted to spend it, you may be better off just throwing every cent at the loans until they're gone. Personally, I would be tempted to change my mind later and throw the buffer at debt rather than spending it, but each of us are different.

Another Reader

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Re: Empty savings to pay debt?
« Reply #19 on: March 19, 2013, 07:39:42 PM »
You just survived a round of layoffs and you have no savings?  Did you not learn from this experience?  In your shoes, I would work on building a savings account to cover a few months of expenses, especially rent and anything else not easily paid with those credit cards.  How are you going to pay those minimum payments for the 8 to 12 weeks it takes in some places to collect unemployment?

sherr

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Re: Empty savings to pay debt?
« Reply #20 on: March 21, 2013, 08:23:54 AM »
I would, however, use all of the rest of my disposable cash to pay off the student loans as fast as possible. My logic: sure, the stock and bond markets *could* pay 5%, 7% or 12% over time. There is NO GUARANTEE! They could tank and give negative returns. Nobody has a crystal ball.

What you know for sure: your debt will continue to compound at 4.30% until you pay it off. Putting all your money into hammering that down will "earn" you a "guaranteed return" of 4.30%. Plus, it gets the debt monkey off your back as quickly as possible.

Hmm. Maybe you should re-read this article:
http://www.mrmoneymustache.com/2011/06/06/dude-wheres-my-7-investment-return/

When you're talking about a 15+ year time frame the stock market is pretty well guaranteed.

layzbones

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Re: Empty savings to pay debt?
« Reply #21 on: March 21, 2013, 09:56:43 AM »
Thanks for all the input guys - its a huge help to read everyone's different perspective.  It's pretty clear that things have settled at the job and that I'm safe for a while.  I'm a high performer at a low pay level so they get a lot of bang for their buck :)

I think this is what I will plan to do:
1) let the 0% debt ride out it's term and set up automatic payments to allow it to be paid in full by 2-3 months before interest would kick in.  Set it and forget it.

2) Make it my primary goal to save up $10k for to set aside for emergencies.  I'll keep this around in an easy to access account.  Goal to have this done in 10-12 months.

3) Double the payment on the 20 year loan.  I was a bit shocked to see that I'm only at the 50/50 mark of principal/interest on that one (logically it makes sense but it was an eye opener for sure).  So I'll try to take that down to a similar pay-off date to the 10 year loan.  Thankfully the interest rate on those are not too bad compared to some of my friends who are at 6-7% on their student loans.

4) Once emergency fund savings are said and done I'll find a nice balance of loan payoff and long term ER savings contributions, likely leaning heavier towards ER savings to start building up a nice base.  I've got a year to figure this out I guess, time to hit the library and learn about investing!

5) Work over the next year to transition into a more MMM lifestyle.  I'm relatively close already but I'd say my life is pretty cushy and there's a bit of fat to trim.  My car is paid for but is a gas guzzler (2001 pathfinder 4x4, lots of fire roads in the NC mountains for biking, camping and climbing) so over the next year I am also planning to swap that out for an alternative.  I live close to work and bike most places so gas isn't too bad.

Thanks again for all the info - you guys rock!

kisserofsinners

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Re: Empty savings to pay debt?
« Reply #22 on: March 21, 2013, 10:31:52 AM »
GoGoGo!!! Thanks for sharing your process.