Top priority: CC debt, loans, or emergency fund?

**maat55** · 10-05-2008, 07:37 AM

Normally I would tell you to build a 2k EF and payoff debt. But as you have stated, the economy is a unusual factor now. If you are worried about your income, build a 3 month EF, then attack debt. If your income is secured, do the 2k and pay down debt.

Using a lower EF, you need to be very intense about how quickly you do this. I would still invest in your 401k to the match if applicable.

It appears your order may be to appease your parents, if they are not a factor, I would payoff the car before them.

There is nothing wrong with building a 1k EF and then paying off the CC's, then go back to 2k EF or 3 month EF. I personally, built my EF to 3 months before finishing my debt, due to the economy. Also, I would put the full 800 to work in this plan and refrain from blowing any of it.

I would also suggest that you sell anything you can and get a second job to speed up the process.

**jIM_Ohio** · 10-05-2008, 08:44 AM

My thought is make sure 20% or more of your gross income is used for debt reduction or savings.

This 20% is "free cash flow" and could be used month to month for emergencies until the cc are paid off. Once cc are paid off, get an EF with 3 months expenses created.

**MYOM** · 10-05-2008, 09:09 AM

I would recommend:

1. Establish an Emergency Fund of 3-months net income.

2. I have never paid $1 in CC debt ever. Rule #1 in my house is to pay off all CC debt in full every month. I limit the number of CC's to two. So paying off your highest interest rate debt first is very smart.

3. Education debt is good debt but I don't care for auto loans ever. If all I could afford is a 1981 Honda Civic then that is what I would be driving. If I can't pay cash for a car then I have not earned the right to have it. Today, I own two sports cars, a family car, and an airplane but they are all paid in full.

Good Luck!

Dan Clemons, author and retired Certified Financial Planner

**snafu** · 10-05-2008, 09:30 AM

The economy has created 'special circumstances' so I suggest you 1st review your expenditures to see what could be reduced or even eliminated until Feb. when it would be re-assessed.

Rather than feeling deprived, create a poster size chart and stick it on the wall in a private area. Deduct payments and show your balances reducing ea. month as a visual to strengthen your resolve and feel better about your effort.

2nd, ask parents if you could re-negotiate your payments to them for several months without causing them financial problems. Explain that you see the need for an emergency fund and whatever reduction negotiated would be used to create it. Once you have accumulated a 3 month cushion, the original payments would be re-instated.

3rd, once you have accumulated enough, transfer your EF to a Money Market a/c or highest saving a/c availabe in your region. There is no point in keeping EF in chequing where it is too easily spent.

4th, call CC companies and ask to have interest rate lowered. There is no harm in asking and the worst that can happen is they will decline. Check and re-check to see if you can move your accounts to some other lower rate CC. Stop using CCs; accelerate CC payments from reductions / elimination of expenses. If you can earn a bit more, get a salary increase, sell items you no longer use or love, any 'found $$$, those sums however small help reduce your balances.

5th: of course you need to carry on payment on other credit obligations [car, student loan etc].

**LivingAlmostLarge** · 10-05-2008, 10:43 AM

How stable is your job? There is nothing wrong with EF builiding if you are unsure where your job is going to be in 6 months. I would definitely save some EF at least 1-2 months but more if you are unsure about the job.

Then target the credit cards.

**AccountAnalyzer** · 10-05-2008, 11:39 AM

Originally posted by maat55 View Post

Normally I would tell you to build a 2k EF and payoff debt. But as you have stated, the economy is a unusual factor now. If you are worried about your income, build a 3 month EF, then attack debt. If your income is secured, do the 2k and pay down debt.

Using a lower EF, you need to be very intense about how quickly you do this. I would still invest in your 401k to the match if applicable.

It appears your order may be to appease your parents, if they are not a factor, I would payoff the car before them.

There is nothing wrong with building a 1k EF and then paying off the CC's, then go back to 2k EF or 3 month EF. I personally, built my EF to 3 months before finishing my debt, due to the economy. Also, I would put the full 800 to work in this plan and refrain from blowing any of it.

I would also suggest that you sell anything you can and get a second job to speed up the process.

I asked a similar question last week about should I let my EF account grow and attack my debt at a later time due to the economy and everyone who replied told me to STILL pay off my $790 debt. So just wondering why this person is being told differently

**maat55** · 10-05-2008, 11:50 AM

Originally posted by AccountAnalyzer View Post

I asked a similar question last week about should I let my EF account grow and attack my debt at a later time due to the economy and everyone who replied told me to STILL pay off my $790 debt. So just wondering why this person is being told differently

This OP has a longterm debt problem, you had a very shorterm problem. You are also at the limit, on your card. Your attitude is rather childish. The fact that you are looking for advice is a good thing, taking advice is your challenge.

**disneysteve** · 10-05-2008, 12:42 PM

Originally posted by AccountAnalyzer View Post

I asked a similar question last week about should I let my EF account grow and attack my debt at a later time due to the economy and everyone who replied told me to STILL pay off my $790 debt. So just wondering why this person is being told differently

Your situation isn't similar at all. You have a $1,000 EF, a tiny amount of debt and the means to pay it off within 2 months without touching your savings at all.

This poster has $69,000 in debt, zero savings and only has $800/month free after paying his bills. It would take him more than 7 years to pay off his debts even if he put the full $800 toward them.

I'm not sure how you are seeing the two as similar.

**kork13** · 10-05-2008, 06:59 PM

prefacing with "IMO", my 1-Line summary... Put priorities in this order: EF, CC's, Loans, EF, Retirement.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
My read of the OP is that the parents aren't actually owed anything--duc took out a personal loan in order to repay the parents upfront.

My general guidance would be to set up automatic payments of the minimum on everything (to prevent rate hikes on the CC's and prevent the other debtors from coming after you). This will give you a baseline of what 'extra' you have available to pay down the rest. So let's pretend all of the minimums come to $500/mo.

With the remaining $300, first build up an EF of at least 1-2 months expenses, preferably 3. Once that's done, put that $300 toward the CC1 balance (at 14%). When that's paid of, move on to CC2 (at 12%), also adding in the minimum payment freed up by paying off CC1. Keep up the same process with the car loan, then the personal loan, and finally the student loans. This part seems backward, but the car loan is in no way "good". It's tied to a depreciating asset, your car. Next, the personal loan is with your local bank (i assume?), so by this time (likely a few years away), they'll probably be wanting you to pay up. Finally, the student loans are expected to be paid over time.... don't rush them then. 6.625% isn't great, but it's not awful.

After your debt is GONE (congratulate yourself), you want to build up your emergency fund to include up to 6 months' expenses. Once that's done, you'll need to focus on getting retirement save for, because you'll be approaching 40yo at this point.

Keep in mind I say all of that assuming nothing changes in your financial situation--try to reduce your expenses as much as you can, and maybe look into the possibility of getting a raise at work, or finding a better-paying job.

You aren't in an impossible situation, you can definitely pull yourself out of the hole you're in right now. It's just gonna take some time and dedication. Good luck with everything!!

**duc998** · 10-12-2008, 02:48 PM

Thanks to all of you for the thoughtful replies! The overall consensus seems to be to build up about 3 months of an EF then attack the debt. Here's a follow-up if anyone is interested:

This week I discovered that CC1 ($1300 @ 14%) has a 0% APR on balance transfers for 12 months offer. I checked and my other CC (credit union) has no fees on balance transfers.

So, I think I am going to transfer the $1300 onto the $1700 @ 12% CC, then transfer that $3000 sum back to CC1 and get their 0% offer.

Yes, there is a 3% BT fee for that. But, that is about three months' interest as things are now. The cards would not be paid off in 3 months either way, so I see this as a cost not relevant to the decision. And yes, I will be sure to keep making the payments until the BTs go through.

With the CC debt on hold for a year, I will be more free to work on the EF. I will build that up as high as I can in the next 12 months (I'll put it in a currently-empty money market account I have) then use that to wipe out the CC debt once the 0% APR ends.

I just sold a motorcycle I had (for the payoff amount, so no cash there) and I have some parts and accessories for it I am going to eBay. I have some other odds and ends I'm going to sell, too, and I think I'll be able to net at least $500 from all of it.

The money I owe to my parents actually pays the payments on a loan they took out against their house to pay off my private student loans (that were like 10% APR), so skipping payments on that to build the EF faster isn't an option.

There's no imminent danger to my job that I see, but 100% of the company's income comes from consulting work for clients, so an overall downturn in the economy could cause clients to cut expenses (i.e. us). Our clients are in a variety of industries, at least, so I don't suppose I'm at any greater risk than most other people.

Oh, someone mentioned 401k, but my company does not offer any retirement matching.

Finally, I just got a raise this week without even asking! Well, not exactly a raise...but I've been given some additional duties and given an extra $300/month (take-home) for that, so that will help too!

So, I think between this raise, saving instead of spending, selling some stuff, and the tax return I expect to get in February, I should be able to have a three month EF by February, if not sooner. By the time the 0% APR on the CC debt ends, I should have enough to pay it off and have a six month EF left over. Then I will attack the loans.

I feel much better now.

Top priority: CC debt, loans, or emergency fund?