saving vs debt

[LennyOnPs3]

hello all...

im new on this site and enjoy it very much. i've had a budget for a bit now and trying to work out the kinks. here's my question, but if i have debt ie: credit cards and whatnot. should i not save and pay down my debt 1st, OR should i do both. pay down my debt ( a lil slower than i would if i wouldnt save) BUT have a lil bit of money going into some savings??

i hope i make sense out of this. by the way i have about $4,000 in credit cards BUT they are 0% interest for about 1-2 years. ( wife n i just moved to an apt and bought new furniture since its our 1st apt together, that explains the $4,000).

so pay it down completely and then start saving? or save while paying down?
if i had an extra $200 a month should it go to paying the debt down or savings?

[sweeps]

If the cards are 0% for over a year, pay the minimum and put all your free cash in savings and/or investments.

[LennyOnPs3]

by the way i forgot to mention that we do have $1000 in a savings account.

my way of thinking is as follows: if i pay all my debt down now. i can save alot more once its all paid off. also, what i want to start doing is have 3 savings account. 1 for EMERGENCY FUND, 1 for "XMAS GIFTS" and 1 for "VACATION"

[sweeps]

if i pay all my debt down now. i can save alot more once its all paid off.

Illogical. Since your debt as at 0%, you will save more by putting your money into savings and earning interest. If you pay off the debt first, you'll miss out on that opportunity for interest.

[kork13]

Totally agree w/ sweeps... Take advantage of the 0%! Pay your minimum so that the CC company doesn't get cranky, but then save/invest all the rest in order to collect interest/returns on it and get a leg up on your debt.

[LennyOnPs3]

interesting. well this is what i have, 1 credit card with 12 months 0% interest and 1 card with 24 months 0% interest. so what i did was divide the total for each and divided by the amount of months i have the 0% for and thats what im paying those credit cards. so im not just paying the minimum. its about $237.00 a month that im paying for both of those cards.

[kork13]

not a bad way to go, that way you'll never pay interest on it... I think personally, i'd do it a bit differently... Still keep the focus to not pay a cent in interest, but rather than paying the CC company the extra $$, I'd pay the minimum each month, then put the extra in some sort of high-yield account... Online savings account, CD, Money Market fund, or short-term bonds. Then when the time came for the 0% to run out, I'd cash in the high-yield account enough to completely pay off the card. That way, I still pay no interest, it's completely paid off, and I walk away with 1-2 years worth of interest. Just me, though....

[cptacek]

I can understand the hesitancy of just paying minimum payments on a 0% interest loan until the last one, and then sending off a huge chunk...you are afraid that along the way you will cheat and not save up the necessary chunk to pay it all off.

One note of caution...a lot of the times, the 0% interest on loans for furniture applies only if you pay off the balance before the end of the term. If you go 1 day over, you pay the 23+% (i'm guessing, but that is what mine is) interest from the beginning of the term.

So, I plan on paying the last payment the month before the 0% expires. I count up the months between now and then and divide the total balance by those number of payments. I pay that amount every month...it becomes part of my budgeted expenses. Then, I know that it will be paid off on time, I feel better seeing the balance go down, and I can concentrate on other goals with any extra money I have.

[cptacek]

Er, uh, you already figured out my system. I left the computer for a while and didn't see your reply. Sorry.

[maat55]

Unless you have a specific need for a large emergency fund at this moment, I would have just a 1000 dollar ef and pay off the all the debt first except your house. After you pay the debt you can build a larger ef, then move on to investing.

I also suggest that you find extra work to increase your ability to pay the debts quicker.

[Pitman]

so pay it down completely and then start saving? or save while paying down?
if i had an extra $200 a month should it go to paying the debt down or savings?

I think everyone is plagued by this question, either continue saving or just pay down the debt. I chose the latter which is try my best to do both. With school tuition looming ahead, I can't lose my savings, and the money I make now, I'm able to pay double the amount on each bill each month, and still be able to save a very good amount.

In your case, the CC have no interest for a year, even though it might not seem that way $4k is can be paid off before the interest kicks in, which I hope your planning on doing.

[noppenbd]

There are two answers, and many people in each camp:

Mathematical answer:
-Wait until last possible minute to pay off cards, paying minimums on the cards and putting every other cent into a high-yield savings account. Then at the last possible minute pay off the cards and pocket the interest.

Behavioral psychology answer:
-Aggressively pay off the cards, then aggressively save.

If you put the whole $437 a month towards the cards (237 currently going in + 200 extra), you will pay them off in the 8th month.

If you instead invest the money, with current interest rates at around 3.5%, you will net around $47 in those 8 months. Then you will pay taxes on that interest, so after tax net is around $40.

To me, it is not worth it to make $40 to do all the shuffling around of accounts and take the chance that you miss a payment. Just pay off the CCs aggressively and then ratchet up your savings with the free money afterwards.

[jimmyengland]

Totally agree with kork13 if you are good at saving and not spending the money you intended to save to pay off cc. Although it is not that much interest as noppenbd pointed out something is better than nothing. Just make sure you pay off the debt before they adjust!!!!! Good luck

[sweeps]

Mathematical answer:

Behavioral psychology answer:

The trick is to behaviorally psych yourself out so you do the mathematically right thing.

[noppenbd]

The trick is to behaviorally psych yourself out so you do the mathematically right thing.

True. But when I see people carrying balances on their cards, it seems to me they have already shown that they not making decisions mathematically.

Although 0% cards are technically not costing any interest, in this case, I would say the savings account earned interest is just not worth it. You are talking about a max of $40 over an 8-month period, and that is if interest rates don't go down anymore, which they likely will. The risk is you miss a payment and your 0% is gone. Why bother? The balance is not that high, just pay the stupid thing off and be done with it.