Best use of unexpected money towards debt

[reedda]

Hi!

I have just received some unexpected funds and I have about $4200 to apply towards debt. I normally "try" to follow the debt snowball philosophy (quotes on "try" because I'm not always so dedicated...), however in this case I am wondering if it would be best to pay off a debt that would give me back the most money each month in payments, to use towards paying other debt. That sounds confusing, I'm sorry.

For example, I can use the $4200 to pay off my $2700 car loan ($264 payment) and a $1400 401(k) loan (payments taken biweekly from paycheck, ~$219/month). After doing this, I would have an additional $483 per month to apply to other debts.

Or, I could use the $4200 to pay off 3 to 4 credit cards and while I know this would save me interest money in the long run, in the short term, I'm gaining only about $150 in minimum monthly payments, plus the "whatever extra" I could throw in which usually is about $100, so $250.

I'm thinking it would be more beneficial to pay off the two largest debts. Doing this, I should be able to pay off all 4 credit cards within 6 months if I apply the $483 solely to them.

I would appreciate any thoughts or advice on this! Am I missing something else?

Thanks!

[siggy_freud]

Hi!

I have just received some unexpected funds and I have about $4200 to apply towards debt. I normally "try" to follow the debt snowball philosophy (quotes on "try" because I'm not always so dedicated...), however in this case I am wondering if it would be best to pay off a debt that would give me back the most money each month in payments, to use towards paying other debt. That sounds confusing, I'm sorry.

For example, I can use the $4200 to pay off my $2700 car loan ($264 payment) and a $1400 401(k) loan (payments taken biweekly from paycheck, ~$219/month). After doing this, I would have an additional $483 per month to apply to other debts.

Or, I could use the $4200 to pay off 3 to 4 credit cards and while I know this would save me interest money in the long run, in the short term, I'm gaining only about $150 in minimum monthly payments, plus the "whatever extra" I could throw in which usually is about $100, so $250.

I'm thinking it would be more beneficial to pay off the two largest debts. Doing this, I should be able to pay off all 4 credit cards within 6 months if I apply the $483 solely to them.

I would appreciate any thoughts or advice on this! Am I missing something else?

Thanks!

How much debt do you have on your cards and at what interest rate?

Generally higher interest first, but if you can wipe out those two debts and save nearly $500 a month NOW, and put that $500 towards cards, it could make life easier. Keep in mind though that it may SAVE you less money overall depending on the interest rates.

[reedda]

How much debt do you have on your cards and at what interest rate?

The 4 credit cards total $3746 as of today, with interest rates ranging from 18.4% to (gasp) 24.99%. The car loan is 6.5% and the 401(k) loan is 4.24%

Pay off the 401k loan first because it is the most dangerous. If you should leave your job for any reason, you will have to pay off that loan in 60 days or it will be treated as a withdrawal. That means that it will be taxable plus you will be charged a 10% penalty for early withdrawal.

I didn't even consider this, thank you!

[twest]

my thoughts

I agree with artwest about the 401K loan. Get that finished first. If it were me I would probably tackle my credit cards next just because of the high interest rates. I would pay off the car loan last just because it is such a lower interest rate than the credit cards. If you can give us balances on each credit card with rate we might could make a better determination in regards to the order you should pay them. The main thing is you will be getting rid of a lot of debt so good for you on being disciplined to do that rather than blowing the money.

[Tree0164]

Pay off the 401k loan first as those are some of the worst loans to have.

I would then tackle the credit cards with the $2800 leftover.

If you don't have an emergency fund, make sure you take atleast $1k to fund that.

Good luck

[reedda]

Thanks to everyone for the responses!

And, I've unfortunately miscalculated. I owe $2400 on the 401(k), not $1400, so I couldn't pay off both that and the car ...

I'm thinking I should pay off the 401(k), and put the rest towards credit cards. Should I go for the higher balance/higher interest rate card first? or knock out the 2 smaller balances and put remainder towards the third?

Here's what I got (balance/interest rate):
1: $ 639 / 18.4%
2. $ 665 / 21.5%
3. $1012 / 22.9%
4. $1430 / 24.99%

(I do have other credit cards, unfortunately, but none with small enough balances to consider in this scenario)

Thanks for the advice!

[snafu]

How secure is your employment? How dedicated are you to clear credit cards charging you incredibly high interest rates of 25% ,23%, 21% ? Are these the result of 0% purchases that reverted to high cost interest rates? How many more CC balances?

I'm guessing the cumulative interest paid on all your credit cards in 2012 would shock you. That could be a huge motivating factor to significantly reduce spending in the short term to regain control of your money. Can we help you work out a plan?

[eLIEjahTailor]

Thanks to everyone for the responses!

And, I've unfortunately miscalculated. I owe $2400 on the 401(k), not $1400, so I couldn't pay off both that and the car ...

I'm thinking I should pay off the 401(k), and put the rest towards credit cards. Should I go for the higher balance/higher interest rate card first? or knock out the 2 smaller balances and put remainder towards the third?

Here's what I got (balance/interest rate):
1: $ 639 / 18.4%
2. $ 665 / 21.5%
3. $1012 / 22.9%
4. $1430 / 24.99%

(I do have other credit cards, unfortunately, but none with small enough balances to consider in this scenario)

Thanks for the advice!

Me personally, I would pay off the 401(k) and use the remaining $1800 to pay off that high interest $1430. Then use the remaining $400.00 to treat myself. Always treat yourself, it helps make things that much more bearable.

[kork13]

This may not be the most popular suggestion, but I would actually recommend you leave the 401k loan as it is for now. You're getting absolutely GOUGED with those credit cards! You're paying 5-6 times as much in interest as on the 401k loan, and as it is, the 401k loan will be repaid in about 7 months. Unless you're concerned about being laid off at some point in the next year or so, you should be fine with the 401k.

I suggest you pay off ALL of your credit cards TODAY. Do you realize that at those interest rates, your CC debt would double in 3.5 years? Get rid of those right now.

As for the remaining $700, a question first: do you have any cash in a savings account?
- If no, then save that $700 for emergencies. That will help keep you from having to resort to credit card debt in the future.
- If you have at least $1,000 in savings, then send that $700 toward the 401k loan.

In either case, from here you want to focus most of your spare cash toward the 401k loan until it's gone (just 3-4 months in the second case), then turn to the car loan. If you can, you should probably try to also send some money toward your savings each month as well (even if only $50/month or something). Savings is what keep you out of debt. Once you're totally out of debt, save as much as possible for a while to build up a good solid buffer for yourself, so that you never have to get yourself in debt like this again.

[reedda]

Thanks so much for all the advice and perspective! I have a few days while I wait for the check to clear, and this is awesome discussion to help me use it for good instead of evil

How secure is your employment? How dedicated are you to clear credit cards charging you incredibly high interest rates of 25% ,23%, 21% ? Are these the result of 0% purchases that reverted to high cost interest rates? How many more CC balances?

I believe my employment situation is very secure. Something incredibly major would have to occur for that to change. Not that it's impossible of course, but pretty unlikely. I am very fortunate to have the job I have.

Yes, 3 of those 4 cards sucked me in at 0% interest and I was SURE I would pay off before the interest hit. Famous last words.

I am trying hard to be disciplined at paying them off, as well as trying to be disciplined on my other bad spending habits (eg. eating out, going shopping on a whim...). But, I have a hard time being disciplined this way.

Other credit cards (if I'm not going to pay off 401(k) loan, 5 &/or 6 can now be considered):
5. 2432 / 23.99%
6. 2681 / 22.98%
7. 7026 / 19.24%

I don't exactly have cash in a savings account... this is bad.... I carry reasonable balances between 3 checking accounts at any given time that usually total over $1000, which is my "emergency money". I don't live paycheck to paycheck, unless I get stupid on a weekend and splurge excessively ("emergency money"), which DOES HAPPEN !! UGH!! My bad reason for doing this is probably worthy of another thread entirely...

[kork13]

I am trying hard to be disciplined at paying them off, as well as trying to be disciplined on my other bad spending habits (eg. eating out, going shopping on a whim...). But, I have a hard time being disciplined this way.

Other credit cards (if I'm not going to pay off 401(k) loan, 5 &/or 6 can now be considered):
5. 2432 / 23.99%
6. 2681 / 22.98%
7. 7026 / 19.24%

I don't exactly have cash in a savings account... this is bad.... I carry reasonable balances between 3 checking accounts at any given time that usually total over $1000, which is my "emergency money". I don't live paycheck to paycheck, unless I get stupid on a weekend and splurge excessively ("emergency money"), which DOES HAPPEN !! UGH!! My bad reason for doing this is probably worthy of another thread entirely...

All of this is very concerning... Yes, I'd say you should definitely focus any/all cash to those high-interest credit cards. Are those 7 cards everything? Especially compared to the huge balances and exorbitant interest rates you've got on those credit cards, the 401k loan should be of little concern. Keep paying the $219/mo to get it repaid, but you need to focus every other cent to your credit cards.

You absolutely MUST get your spending under control. It's very clear that you have a tendency to spend money on credit that you can't immediately pay back... That's a major problem. I know that it's hard to break the habit of spending on a whim (I'm guilty of it myself sometimes), but if you can't afford to pay for it, you CAN'T let yourself buy it. As something to help you get a handle on your spending, try keeping a notepad in your purse and write down every cent that you spend. Every time you write something down into your notepad, I want you to make a note if the expense is a "Need" or a "Want". Doing so will give you better awareness of what you're spending where, and also give you a better sense of spending priorities. And otherwise, you have to resist the urge to splurge.

An "emergency fund" needs to be something reserved strictly for emergencies -- it's not your "backup spending money". I would strongly recommend you open up a separate savings account somewhere that you don't have frequent access to, put your $1000 in there, and keep it sacrosanct for true emergencies... I mean it's for covering stuff like a car insurance deductible, if the dishwasher explodes, and that sort -- not "Momma needs a new pair of shoes!"

[reedda]

An "emergency fund" needs to be something reserved strictly for emergencies -- it's not your "backup spending money". I would strongly recommend you open up a separate savings account somewhere that you don't have frequent access to, put your $1000 in there, and keep it sacrosanct for true emergencies... I mean it's for covering stuff like a car insurance deductible, if the dishwasher explodes, and that sort -- not "Momma needs a new pair of shoes!"

That's funny! As I was writing that last paragraph, I was thinking the exact same thing..."where can I put this money so that it's not a victim of my bad decisions...". So, I will find a bank that I don't currently have a checking account with (because I can just transfer funds back into the checking account, from experience that is way too easy to do).

Yes, I do have a problem with my spending and recognized that problem quite a while ago. I am really, really working on it. I am far better than I was a year or two ago, evident by my applying this unexpected money to debt as opposed to BLOWING IT! Because I really do need a new pair of shoes! Just kidding, I don't. But it would make me happy...

Thanks again!

[Petunia 100]

How is your credit rating? If it is good, I suggest you apply for a 0% balance transfer offer. If you can reduce the amout of interest you are paying, that will help you pay off your debt faster.

Do you have trouble making ends meet each month? If so, paying off the car would make sense as it would free up cash flow. If not, then go for the credit card debt, highest interest first.

Are you paying everything on time each month?

Are you going further into debt each month?

[snafu]

I don't mean to sound snarky but you're a smart lady who has been making poor decisions about managing money. You really need to reverse the drain on your income or those interest rates will wreck everything. In the short term you need to impose some discipline and knock off those credit cards, one-by-one. I hope you'll open a saving account with at least $ 1,000. for genuine emergencies. Life happens and a cushion helps.

[reedda]

How is your credit rating? If it is good, I suggest you apply for a 0% balance transfer offer. If you can reduce the amout of interest you are paying, that will help you pay off your debt faster.

Do you have trouble making ends meet each month? If so, paying off the car would make sense as it would free up cash flow. If not, then go for the credit card debt, highest interest first.

Are you paying everything on time each month?

Are you going further into debt each month?

Credit rating is ok, about ~700. I did one of those 0% balance transfer offers once a few years ago, and ended up charging up the other cards once I paid them off. BAD! I'd honestly rather not open another account. I'm not quite there yet mentally.

I don't have a problem month to month. All bills are paid on time and I throw $100-$150 and sometimes more at my lower balance cards, while keeping ~1000 balance in my checking accounts (across three accounts). I can buy groceries when I need them and sometimes even when I don't, can get gas when I need it, go out to eat when I don't need to, etc, etc. Income is not a problem at this time. There have been times I get ... ummm ... I don't know how to say it. I have a moment, and I overspend on a weekend, but that hasn't happened in a while now. {{KNOCKING ON WOOD!!}}

I am not going into debt further each month, I guess unless you count interest on those cards. Some or maybe most of those cards could just be sustaining balance.

I don't mean to sound snarky but you're a smart lady who has been making poor decisions about managing money.

Oh my gosh, that's all you got? Not at all snarky (I love that word by the way ), thank you so much for the compliment! Believe you me, there is no one that can make me feel worse than I can myself. I have been blowing it beyond belief.

I do need discipline, and it's hitting me like a brick. I've realized what I have, and what I DON'T HAVE and had the opportunity to have. I've realized that I want a retirement someday, and more than that, I want more of a retirement life than I've had a working life, so I better get my butt in gear and take care of this situation I've put myself in to.

Thanks so much for all the help!