Should I put money into savings or pay bills?

August 12, 2007

Posted by fishfuse1231231

( 1 rating )

First things first. Get on a written budget. If you haven't done that already, you can gain complete control over your finances by doing it. Money will go farther and you can pay off debt quicker.

Second, you need $1000 - 1500 in the bank for emergencies. Since you don't have anything in the bank right now, do like you said and put at least $1000 - 1500 in savings. I wouldn't argue too much with $2000. You want to maintain this amount because when emergencies happen, you can pay for them instead of borrowing. So, if you use some of the emergency fund, build it back up ASAP.

Third, start paying off your debts smallest to largest. You could make an argument about interest rates and paying off the highest first, but if we were thinking logically all along, you wouldn't have this debt to begin with. ;-) (BTW, been there, done that). The key is that all humans need encouragement. Taking a long time to pay off the highest dollar, highest rate debt doesn't encourage us because the end isn't in sight. As you pay off the smaller ones, it encouraging to see progress.

Pay as much as you can towards the smallest and the minimums on the rest. After paying off the smallest, roll the full amount you have been paying on it into the payment on the next largest. Once that one is paid off, you will then be rolling the payment amounts of the first 2 debts into the 3rd. This is the debt snowball that Dave Ramsey teaches.

Apply your bonuses in the same manner. After putting aside your emergency fund with the first bonus, use all of the 2nd bonus for debt.

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August 11, 2007

Posted by mikefortman

( 2 ratings )

Depends on the interest you are paying on the cards, really. If one of those is a store card where you have a same-as-cash plan and are planning to pay it off during the promotion period, then don't put any extra on that one.

However, unless you have nothing in savings at all, I would put it on the credit cards (putting the most on the cards with higher interest rates and working down from there). If you have no savings, you need to save a little bit for future emergencies (that way you can pay cash and not finance them), but still put the majority towards the cards. No sense in sitting on money earning 5% or less when you could use it to pay off bills (which will "earn" you far more than 5% by saving you on interest).

It also depends on how much self control you have with spending, too. If you can pay off the cards and then start putting those payments into savings, then that is an option. But, if you are likely to just pay off the cards without saving anything, and then using the money you are currently spending each month on credit card debt to buy more stuff (instead of saving it), then you definitely need to save first.

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August 11, 2007

Posted by katelinwhite

( 3 ratings )

Hey Track,

When I advise clients on this type of thing, I advocate a 90/10 approach. Put 90% of your disposable, "extra" income into debt relief. That is essentially guaranteed return on your investment (the reduction of interest you're paying) and it helps create more cash flow down the road as debts vanish.

The other 10% should be saved, first with some "rainy day" money (maybe about 3 to 6 months of income at the top, in a regular high-interest money market fund) and then by contributing for retirement in your employer's 401(k) or a Traditional or Roth IRA.

What happens is that the 90/10 split eventually means you're getting more free cash flow as debts get retired, and your 10% becomes larger as you have more disposable income. When your debts are eliminated, you can then divide up ALL of the extra money into various savings "pots" (the rainy day fund, the 401(k) your Roth IRA, etc.)

Just some thoughts...

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