Have a bit of a nest egg or pay off credit cards?
noir_blood
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Registered User regular
Right now, I owe I would say about 3k in credit cards, most of it coming from my recent move. I have just about that in my savings accout. For the most part, I been simply making payments on the cards off my checking account and not touching my nest egg. I don't make full payments, but I don't do minimum so the fees aren't killing me.
Thing is, that the money situation has changed recently, so it looks like I'm going to do just a bit of belt tightening, and was wondering what is the better decision; Keep paying off my cc little by little(the amount I send in would probably go down) and keep my savings for emergency, or pay off my credit cards and have no more savings?
At the end of the day, part of me feels that if there was an emergency where I needed money, it would come out the same. Either I use all my savings and still have credit card debt, or alternatively, have no savings to use, and resort to the credit cards, where once more I have debt. But what would be smarter? I'll admit that part of my reluctance is psychological, as I'm deathly afraid of living paycheck to paycheck, and the nest provides a nice cushion. And with all the stories of credit cards lowering your total spending amount, it would suck to pay it off only to then become useless if I really need it.
Thing is, that the money situation has changed recently, so it looks like I'm going to do just a bit of belt tightening, and was wondering what is the better decision; Keep paying off my cc little by little(the amount I send in would probably go down) and keep my savings for emergency, or pay off my credit cards and have no more savings?
At the end of the day, part of me feels that if there was an emergency where I needed money, it would come out the same. Either I use all my savings and still have credit card debt, or alternatively, have no savings to use, and resort to the credit cards, where once more I have debt. But what would be smarter? I'll admit that part of my reluctance is psychological, as I'm deathly afraid of living paycheck to paycheck, and the nest provides a nice cushion. And with all the stories of credit cards lowering your total spending amount, it would suck to pay it off only to then become useless if I really need it.
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The rest you should probably put towards reducing your credit card balance, since the interest on your savings will likely be dwarfed by the interest on your credit card.
1. You keep paying a little bit at a time. You pay lots of money in finance charges/interest. If they decide to change anything you could end up paying them even more. When you suddenly lose your job you have a bunch in savings to live off of, but you have to pay that monthly credit card still.
2. You pay it all off. You pay no interest of penalties of any kind. When you suddenly lose your job you have nothing in saving, but you have lower monthly bills. You dont have any cash, but you have the security of the credit card in case you need to buy food or something.
Option 1 leaves you paying extra in the interest.
Option 2 lets you pay it off, feel good about that, and then save up your nest egg again.
This is definitely the way to do it. Always keep emergency money.
If you answer "very secure" I'd suggest keeping $1000 in the bank as an emergency fund. Use the rest to pay down your balance. Maintain the current payment level on your credit card. You should be able to get rid of that last $1000 in a few months (a year, maybe) after which you begin to build up your nest egg again.
If you're less secure in your work, I'd suggest paying off 1k of your credit card and keeping 2k in your bank account to deal with things like rent and other non-credit card-eligible expenses. Try to reduce your credit card debt by as much as you safely can. It's expensive debt, and has a habit of getting more expensive over time as CC interest rates change (usually not, I've noticed, in the consumer's favor).
only place I've had is a 3 bed 2 bath apartment for 800 a month split 3 ways, 250 a month car payments, and a 60 dollar phone
biggest car repair I've had was for 600 for a cracked engine block on a bronco
Car repairs and emergency dental work can generally be paid with cards. As can most things.
You really only need enough cash (as in, in the bank) to pay bills that cannot be paid with credit cards. For however many months you're trying to maintain an emergency fund for (one is, like, a minimum...two is better).
In our case, that's rent, garbage, student loans, and....credit card payments (minimums). Yep, I think that's it. Some people may need to add things like auto loans. Student loan servicers will almost always work with you in the common circumstances that would cause you to miss a payment (like sudden unemployment). So in our case, that's really just rent, garbage, and the minimum on our credit cards.
Which, for us, is well under $1K.
Having enough in savings to cover all your bills is spiffy and all, but if you're carrying a revolving credit card balance it's probably not really advantageous. Once you've paid off the card, that's the time to keep an emergency fund around. And even then, you might want to keep most of it in something less liquid but with a higher return than a savings account, because if something comes up you can always use your credit cards until you can access those funds. That's a pretty complex situation to assess, though.
The OP's is simple. You want to keep enough money to pay your cash-only bills/expenses for one month at a minimum, maybe two. Put the rest towards the card.
You need to have some emergency money, but it's never a good idea to have credit card debt any longer than you absolutely have to, it costs a lot more than some people seem to realize. Pay it off asap (within 2 months if at all possible), then keep paying the full amount on your monthly bills.
It's unlikely, unless your checking account is some sort of extremely high interest account that the interest earned will be more, so the obvious frugal thing to do is pay off the bill because that costs you less in the long run.
Having a cash reserve for emergencies is certainly good advice but there's a couple of things to consider first:
If you are seriously concerned that you may not be able to pay your mortgage or rent due to becoming suddenly unemployed then you should really take out insurance against it if you haven't already. $1000 might cover you for a month but if there are serious reasons why you can't pay the bills, that isn't really going to save your skin.
Secondly, the credit card might be a useful source of credit in a stick - say if you over-spent on your budget slightly one month and need an extra few hundred until the next pay cheque - but a better option for that scenario would maybe be a charge-free overdraft. This means that if you go into the red, you still pay interest but you don't get hit with any additional fines. The interest on a bank account overdraft is almost certainly guaranteed to be less than the interest on a credit card. All my bank accounts have a charge free overdraft of between £500 - £1000 which I didn't even have to ask for, so getting one for $1000 or so shouldn't be difficult (assuming they exist in the US).
Now, this compliments the credit card rather than replacing it as a source of credit. The advantage of a CC is you have about a month to pay off the balance before interest is accrued. With a bank account overdraft, the interest is applied immediately. So you use the CC for when you know you can pay off the credit within the month and you use the overdraft if you get into trouble and know you will take two or more months to pay off the loan. You may also decide to use the CC in the first instance and then use the overdraft to pay off the CC balance if you don't have the cash in time, limiting the amount of interest you end up paying on the loan.
If you do also want to keep a nest egg aside, then do so in a high-interest account or something like an IRA. This means that the money is at least maximising it's benefit to you while it is sitting in an account, rather than earning minimal interest while your credit card debt mounts up. It also means you are more likely to actually treat it like a nest egg and use it in emergencies only, rather than just frittering it on mini-purchases and luxuries if it's sitting in your every day account.
Don't forget that now more than ever credit card companies are raising interest rates without any warning. And even if they don't, paying any kind of interest on your credit card debt is a waste of money if you have the cash to pay it off.
So you plan your budget for the next month, figure out how much you need, leave a buffer of about $100, and use the rest to pay off the cards. You know what your rent/bills are, because you pay them every month. The sooner it's paid off, the sooner your savings are actually "safe" and not actually losing money each month.
Remember, your credit card bill isn't some weird bank construct -- it's your money. In this case it's a negative amount to your total money, so if you have $3k in the bank and $3k in cc bills you actually have 0 in the bank. You're just delaying the inevitable and paying for the convenience.
I was going to pop in and say this. Remember that your credit card debt is money that you already spent. Take your savings right now and subtract the amount you owe - that's how much money you actually have. Money over that amount is just imaginary money that you already spent - in fact, the imaginary money is poisonous, carnivorous money that eats your real money until you get rid of it.
I host a podcast about movies.
Here are some articles regarding questions just like these. Please you your best judgement; I'm only trying to show you that things are not as clear-cut as they were in the past, not that you should not pay off your credit card first or not.
Put Emergency Fund Ahead of Credit Cards?
New Rule: Pay Only The Minimum On Your Credit Cards.
Oprah questions and answers: What should I do, pay off my credit card or have a savings?
Key point?
People have always thought of credit cards being there for emergency situations..but if they close your account if you pay it off..you lose your buffer.
Please be warned.