What should I do first? Saving my money or pay off credit card bills?

Question

I will be honest and say that I have gotten my self and a lot of money problems. My condo was foreclose and I have a least $13,000 in debt. I am trying to start over fresh. I am now able to least put $100 in savings and are paying on my bills. I want to pay off at least one bill by the end of the year if I start paying on it; however I do not want to sacrifice my savings because I am trying to build an emergency fund. Which do I do first? Should I put extra money in the savings account or pay off a bill?

Answer 1

Suze Orman will tell you to pay off all your bills first.  I agree.  What are you making in interest vs what are you paying in interest in your bills.  You are most likely paying more in interest charges on the debt vs the money you are earning in interest.

Answer 2

First make sure you are current with everyone if possible.  Keep in touch with each creditor if you are behind.  They will cut you some slack if you stay in touch and send them what is agreed upon.

Next, pay minimum payments on everything while saving for a mini-emergency fund.  $1000 dollars in a savings account will be your mini-emergency fund.  It's reserved for the unexpected things that happen in life.  Use it only for emergencies.  It'll keep you from relying on credit cards everytime something happens.  

Next, make sure you are on a written budget.  Each month write down what you plan to spend in the next month on everything.  At first, the budget will be off as you learn to adjust and estimate better. When you write it down you would be surprised what you are spending money on.  

Things to save money on:

Car payments:  If you have car payments consider selling the car and getting a get-me-to-work-car for cash.  If you can sell your car get a cheap used car and owe considerlby less money then try it.  Not having a car payment of $400/month makes taht $13000 go away much faster

Insurance:  Get rid of cash-valeu or whole-life insurance plans unless that is the only kind of life insurance you can get for medical reasons.Get some level term insurance.  It's cheap and all you need.

Also, consider raising the premiums on your insurance.  The premium is really the minimum amount for which you would file a claim.  

Cell phones and home phones.  Consider cutting back on home phone options to just the bare phone line.  Most people don't use home phones call waiting and other services much anymore.  Everyone uses cell phones.  

Cable tv; consider suspending cable services for a while.  Not forever.  But, maybe until you get this mess cleared up.

Back to the question at hand:

Don't try saving while paying off debt.  You will be paying interest on the debt that you will more than likely not be able to recoop with investments and certainly not with the interest you get from a savings account or money market fund.  You will be losing money.  

Do this part only if you are serious.:  Stop funding retirement savings accounts while paying off this debt.  If you can pay this off in 12-16 months by working an extra job, or overtime, watching you budget, cooking at home, etc.... then do it.  If you find these restrictions to severe then don't.  You do not want to wake up 50 years old with debt and no retirement funds saved.  

$13000 can be paid off if less than two years with lifestyle changes and a moderate income.  But, you have to work at it.

Answer 3

build the emergency fund -6 months of living expenses then pay off the smallest balance first and then take what you were paying to that one and add it to the next bill then work your way up and out. Then start saving for a new home and in 5 years you can buy again

Answer 4

wow, this is not that huge of a problem if you look at the bigger picture.. i think you should do a little of both at the same time. incline more towards paying off your debts, but still leave even just a little amount to save in case of rainy days. :) an emergency fund is a great idea, but if you don't pay your debt off it will probably accumulate over time and you'll end up paying even more debt in the future...

Answer 5

First of all you could try to settle that debt for less than you originally owe.  I don't know if part of your debt is interest or what.  Then I would start paying of the smaller loan first and try to double the payment.  One at a time.  If you have to work two jobs to get them paid that's what I would do.  It is hard not to use credit because every business wants you to have one of their cards.  But you must remember, they aren't doing for YOU but TO you! Right?  Good luck honey!

Answer 6

I think that you should look into some financial counseling.  I don't want to insult you but I think the United Way can help you... any of us could potentially need their services at some point.  

Answer 7

I would pay off your credit card debt first.  Most likely the interest you are being charged is higher than the interest you would earn in a savings account.  If you could do both that would be optimum - pay a fixed amount on the card (more than the minimum) and maintain that even as the minimum amount due decreases so more goes to the balance.  In addition, don't make any new charges (which is why it is good if you can do both so you have a reserve should an emergency arise).

Answer 8

A good place for part of your emergency fund is a Roth IRA, or if your employer has a 401k, you should at least put enough into that to get any matching funds (free money).

Contributions to a Roth IRA are after tax (no deduction), but you can withdraw any "contributions" at any time without penalty (contributions come out first).  And whatever you can avoid withdrawing (and gains) will grow tax free, as long as you do not draw out gains before age 59.5.

But you are not going to earn as much on savings as you are paying in credit card interest, so make every effort to pay that down as quickly as possible, while maintaining enough of a reserve that you do not get caught short for essential expenses.