Tons of Debt with Savings

[dannysmith82]

Hi All,

I have a dilemma that I hope someone can shed some light for me. I am a 30 year old male with roughly 32K in credit card debt. This 32K is an accumulation of bad choices that happened in my 20's. Now that I am 30 its time to take control of this. So I have 25K saved up and I was wondering if you guys can shed some light for me. Im torn between using some of my savings to pay off the debt or not using it at all. I really don't want to touch that savings because of emergencies and I like having this cushion in my life. What would you guys do? Should I just bite the bullet use it all to pay this off? Should I use partial? Should I not even touch it?

[TheKayla]

Find how much you would need for 6 months of expenses, then take the rest of the savings and put it towards the debt. After that, for whatever is left, attack the debt by being as frugal as possible, downsizing, selling things you don't use, earning more income, etc.

With more debt than savings, you really don't have that much security. 6 months of savings should be more than enough for any quick emergencies, but for real security, you're going to need to get rid of that debt anyway!

[disneysteve]

I am a 30 year old male with roughly 32K in credit card debt.

I have 25K saved up

Im torn between using some of my savings to pay off the debt or not using it at all.

Welcome to the site!

Odds are that you are paying substantial interest on that 32K. Unless you are on a special promotion, credit card interest rates are usually in the 15-20% range, so the longer you hold onto the debt, the more you are actually eroding your savings month by month with interest charges.

You are certainly right to want to have an emergency fund. That is the main thing that will keep you from ever turning to credit cards again to finance your life. But you don't need a 25K emergency fund - at least not until that debt is gone.

I would suggest keeping savings equal to one month worth of living expenses, whatever that is for you personally, and using the rest to pay down the debt. Pay the debt in order from highest interest rate first to lowest interest rate last. That's the way that will save you the most money.

[Bob B.]

I'd second exactly what DS said.

[Randomsaver]

That's what insurance is for --- emergencies.

The questions are :

a) Do you think you can keep your job up to the point you paid your debt?

If not, then multiply your monthly expense x 4. Whatever is left pay towards debt.

If yes, go to (b)

b) Would you stick to your current job up to the point you paid your debt?

If not, then multiply your monthly expense x 4. Whatever is left pay towards debt.

If yes, just keep 1 month's worth of expense as savings. Whatever is left, pay towards debt.


The point is that there are insurance to cover for damages and sickness. But there is no insurance for job security.

[Bob B.]

32K in credit card debt.
25K saved up

I have a bit more time to craft a more thorough response to your question.

Let me make a few assumptions. Of course, I have no idea how close to reality I may be, but...

Let's say that your average interest rate on your credit card debt is 17% APR. You're spending about $450 per month on credit card interest alone.

Let's also say that your monthly living expenses are $5,000. So, you keep $5,000 of your $25,000 in savings, for emergencies, and put the other $20,000 toward credit card debt, eliminating your highest interest rate debt first.

Now, let's say that you've decreased your average credit card debt on the remaining $12,000 to 15% APR. Now you accumulate $150 per month in interest. That's still a lot per month, but a lot less than $450.

If my assumptions are anywhere close to reality, you'll be able to make a lot more headway per month on eliminating your CC debt.

If you can manage to throw $600 per month toward the remaining 12K CC debt, you'll be out of debt in about two years.

Then you can work on building your EF back to where you feel most comfortable.

If you can fill us in on some key information, like total number of CCs, interest rate on each CC, total balance on each CC, minimum due on each CC per month, and monthly budget, I'm sure you'll get some great advice that maybe can get you out of debt before two years.

Good Luck!

[Nutria]

Let's also say that your monthly living expenses are $5,000. So, you keep $5,000 of your $25,000 in savings, for emergencies, and put the other $20,000 toward credit card debt, eliminating your highest interest rate debt first.

Now, let's say that you've decreased your average credit card debt on the remaining $12,000 to 15% APR. Now you accumulate $150 per month in interest. That's still a lot per month, but a lot less than $450.

+1

Note also that once you've got a track record of constant on-time payments (set up auto-recurring payments through your bank or some other web bill pay service), banks will start throwing 16 month 0% balance transfer offers at you. Snatch up a few of them -- make sure they are all at different banks -- and transfer as much as possible into them. The banks are giving you a free $150 per month: spend it on driving down that $12K even faster.

[kaufc]

Welcome to the site!

Odds are that you are paying substantial interest on that 32K. Unless you are on a special promotion, credit card interest rates are usually in the 15-20% range, so the longer you hold onto the debt, the more you are actually eroding your savings month by month with interest charges.

You are certainly right to want to have an emergency fund. That is the main thing that will keep you from ever turning to credit cards again to finance your life. But you don't need a 25K emergency fund - at least not until that debt is gone.

I would suggest keeping savings equal to one month worth of living expenses, whatever that is for you personally, and using the rest to pay down the debt. Pay the debt in order from highest interest rate first to lowest interest rate last. That's the way that will save you the most money.

As difficult as it may seen (Of course, who would want to lose their savings, right? It is a painful process.), it is better to use your savings account to pay your debts than not to use your savings and earn much less compared to what you would pay for additional interests.

[summerdsea]

Pay off your credit cards! You are getting hit with 13-20% interest every month. That is so not worth it. Give yourself a clean slate and start saving after you pay your credit cards off.

[Jsteinkruger]

Look at this a different way, instead of parting with your savings, how would you save by using 10k of that on the credit car debt? would you save per month?

$32000 @ 15% with a 4% min payment would be $1280 / month
$22000 @ 15% with a 4% min payment would be $880 / month

You would save $400 / month in minimum payments, which is $4800 per year. Lets go to the extreme.

Someone said to keep 1 month worth of savings $5k, we will use the example number given.

$12000 @ 15% with a 4% min payment would be $480 / month, which saves you $800 / month. Which would be $9600 save in 1 year.

Now you could be happy with $480 payment per month while you get your savings back up to part, or you could put the extra savings against the card and get it paid off quickly. I hope punching in these numbers helps you.

Right now, I am trying to do the same thing as you but I had 8k CC debt and made a lump sum payment and use what it saves to pay extra to pick away at that balance.

Good luck