Pay down debt vs build savings?

Question

I recently paid off my car leaving about 450 a

month for savings or credit card debt

I owe $6600 on a closed BOA account and currently autopay the min payments the account is closed so i can no longer use it

would i be better off stashing the money that i can have if i need it later or paying off debt with13.99% APR

Answer 1

In very general terms, paying down/off should happen before building up savings, even though you can always find exceptions in specific situations.  The logic behind this approach is the fact that usually debt will cost you much more (in terms of interest you are charged) than gains you will realize in savings (in terms of interest you get).

Looks like your scenario is a simple one.  For more complex situations (involving mortgages, long term holdings, etc.) a financial planner may be helpful./

Answer 2

Jan is correct. There is no investment you can make which will guarantee you a 13.99% return which is what you will be earning by paying down that credit card debt. So put all the money into paying off that debt.  

Answer 3

You can (and should) do both.  Here is a plan that will help you.  If you work the plan, the plan will work for you:

1. Make a budget. Make the budget a week before you get paid. A budget is not a punishment! It is a tool which will free you from ever having to worry about money again. Put everything in your budget. Especially those annual, biannual, or quarterly bills like car registration, insurance, etc. Give every dollar you are going to bring home the name of where it is going. Add an "emergency fund" category to your budget for 25 dollars and save up until you have 1000-1250 dollars. Your emergency fund will help keep you from getting into new debt because of an emergency. If you can, set up a direct transfer to a savings account for your emergency fund. That way it moves automatically and you don't even have to worry about it. You must cut your spending and live on less than you make.

2.First get current on all of you debts and make no more late payments. Stop using your credit cards immediately. Do not take on any more debt. Credit cards are like quicksand only the death is much slower. Make a list of all of your debts in order of highest interest rate to lowest interest. Use cash only for your spending from now on.

3.Pay the minimum due on all of your debts and then put your extra money towards paying off the highest interest one first. After you get that one paid off, you put the money you were paying on debt #1 (the minimum payment and the extra payment) towards debt #2. That will pay debt #2 off faster. When that is paid off, you put all three payments towards card #3 and that one will be paid off pretty quickly. As an example:

To start :

Debt #1 (highest interest): minimum payment+ extra payment

Debt #2 (middle interest): minimum payment

Debt #3(lowest interest): minimum payment

Debt #1: paid off

Debt #2: minimum payment from Debt #1+ Minimum payment from Debt #2 +extra payment

Debt #3: minimum payment

Debt #1: paid off

Debt #2: paid off

Debt #3:Mimimum payment from card #1+ minimum payment from Debt #2+ minimum payment from Debt #3+ extra payment.

That way, you will get them all paid off, on time, and pay the least interest. It will also help towards rebuilding your credit since you will no longer have any late payments. This works no matter how many different debts you may have.

4. After you get all of your debts paid off, add to your emergency fund until you have 6-12 months of income saved up. Put that emergency fund money into a liquid money market fund or into a Bank of America no-risk CD so that if you need the money you can take it out without penalty.

5a. When you have your emergency fund in place, add a category for "fun" to your budget. Save for a holiday, a vacation, a big screen, or dinners out, whatever goal you want. Remember to enjoy your life.

5b. When you have your emergency fund in place, start saving for your retirement. Join the 401(k) plan at work and contribute the maximum. Your employer probably matches at least part of your contribution so why give up free mone?  Open a Roth IRA and contribute the maximum on a monthly basis. If you start saving for your retirement now, you will probably retire a millionaire.

5c. When you have your emergency fund in place, start saving for your next car. Only buy cars, or other things that depreciate, with cash. Save up for a nicer car. That way you get the interest instead of paying the interest.

Answer 4

I would apply $250 to the credit card and save the other $200.  You may have car maintenance, home repair, medical needs or some other unexpected expense come along that will require some cash.

And in the mean time get on a budget.  You can download a free budget workbook from:  http://www.bills.com/guide/

or use an on-line tool at: http://www.kiplinger.com/tools/budget/

By comparing your monthly expenses with your monthly take home pay you may find extra income left over to pay off the credit card and\or save.  Once you're out of debt keep your spending within your income (spend your income according to your budget) and you will stay out of debt in the future.

God bless!

Answer 5

Pay off the debt...no question!!!  You will never find an investment that pays 13.9% to make up for the interest you are paying on the card.

On another note; you are making almost NO headway by paying the minimums on that card.  Pay as much as you can and that debt will be gone quickly.  $6600 may seem like alot to you, but it's not...you can have it gone fairly quickly, but you will never get it paid by paying the minimums.

The quickest way to develop wealth is to not get in debt!!!  Pay off that card!!

P.S.  Credit card companies LOVE (with a capital L.O.V.E.) people who religiously pay only the minimums on their credit cards.  Many people get in over their heads because after a year of paying only minimums, other credit card companies start sending offer after offer for additional cards because you have established that you will keep paying on time, but you never really pay them back.  Credit card companies thrive on consumers who carry large balances and only pay mins.

Ziggy makes good point, however, with a 13.9%, =1.17% monthly, your minimum is probably more like $110-$140, correct?  That leaves an additional 300 of his income to apply to the principal.  Pay that S.O.B. off, fast!! (I agree saving a couple of bucks per months is a good idea in case of emergencies..good point Ziggy. )

Asker:  Your comment about "throwing money away" is the mentality that will get you in trouble again.  Every dime you "save" is only about 1/2 that cuz you OWE!!  You're never truly saving if you have interest-bearing debt, unless the R.O.I. (return on investment) exceeds the interest on principal of your debt!!

Save a couple of bucks for emergencies and pay the rest off fast!!  Any good finacial advisor will tell you that...

Anyway, good luck!!  :)  (look at cclepew's advise below)

Answer 6

Making minimum payments will get you nowhere towards eliminating your debt!

(A) Let's say your minimum payment is $150. At that rate, it'll take you almost TWENTY YEARS to pay it off!  (And with the interest, you will have paid out over $12000, almost double your original $6600!)

(B) But if you put a full $450 towards your debt every month, you'll have it paid off in about a year and a half! (And you'll save a ton in interest charges!)

(See the link below for the debt calculator I used to get these numbers. Play around with the numbers to figure out a plan that works for you.)

Also, it's kind of silly to put money in the bank earning only 1.25% interest (or however little interest the banks are offering these days), while you're paying out 13.99% on your debt. You're actually losing money that way.

Personally, I would save some ($50?) of that $450 each month, and put the rest towards the credit card.  

Answer 7

Generally on 'closed' debts the APR won't change .... so it's fixed ... you therefore, as you have said, have a minimum payment you have to make each month.....

Well done for paying off your car - now you need to look at how best your 'extra'  $450 dollars can be used ....

I would suggest that when you make payment on your debt what you do is go in in person - pay the minimum amount and pay an ADDITIONAL amount - say $100 dollars - as well, but you must make it clear to them that this payment is TO BE MADE AGAINST THE CAPITAL.... What this means is you are meeting your obligation on the interest side (your minimum payment) so you are 'keeping your side of the bargain'.... your additional payment will help to reduce how much interest is being calculated against a capital figure ... so what it looks like is this:

66,00 - minimum payment (guessing) $340 per month ......

$100 - Payment against capital ......

Means interest calculated next month is AGAINST 6500 now ..... Then each month you still pay the $340 AND you pay the ADDITIONAL 100 - which you state each time you make this payment ......

Do this each month and you may find that your minimum payments will not only be paying your interest obligations, but will also quite soon start to be payments against your capital..... You may find you can get rid of this debt sooner rather than later.....

In the meantime you can building up a savings with your extra 350 - and perhaps consider making a lump sum payment against your debt .... or not get into debt with something else you want to buy.....

I generally err on the side of caution in that if my debts are paid up - then if I have no money - apart from not being able to go out and enjoy myself - I won't have any worries because I don't owe anyone anything .....

Answer 8

I'd try to get rid of that debt in the shortest time possible. Not to pay everything at once, but pay a good deal more than just the minimum demanded for that card.