When I first started this blog, I envisioned socking money away in a variety of interest-earning places: IRAs, CDs, and money market funds. I was fresh from the “eureka! Savers build wealth!” experience that the otherwise clueless among us get when they’ve just stumbled across “The Millionaire Next Door,” and ready to start building some wealth.
I was ignoring just one thing (besides how broke we then were): Our small mountain of credit card debt. Checking around with various sites, books, and blogs, I see that our next steps should be:
- Put $1,000 in savings toward emergencies.
- Pay off the credit cards.
- Then, and only then, start really, really saving.
Our credit card debt totals $16,294. Which would mean sending $1,400/month to these bills per month, rounding up, over 12 months. Or over the course of two years, $678.92/month. Or over the course of three years, we approach the range of a hefty monthly car payment: $452.61
This in itself is utterly depressing.
But then there’s the issue of cash flow, which can be a problem with my sometimes irregular income.
Can we really eliminate debt if cash flow forces us to just get out the plastic?
Hubby argues, in our case, for creating a $5,000 savings cushion first. The goal is to have enough income and savings built up so that we put my entire monthly earnings in savings, and draw down our designated amount for our budget from that.
I’m inclined to agree, especially as we can see that paying off this debt — and not putting it back on — is a long-term project.
What do you do? I’d love to hear your experiences, particularly if you have times when your income is not so certain.
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Tags: Cash Flow · credit cards · paying off debt · savings12 Comments
Mathematically, it always makes sense to pay off the credit card bills first (unless you’ve got some awesome 0% deal — but who’s got one of those anymore?) Interest rates on savings accounts are horrible.
Psychologically, it’s nice to know there’s a cash in the bank, even though there’s no financial benefit. If this keeps you moving toward your goals, then it’s a better strategy.
If you guys disagree on this point, I’d split the difference, and put half toward your debt and half toward your savings.
Since I’m a freelancer, too, I’ve been using the third strategy to pay off our second mortgage with an absurdly high rate. I could pay it off faster than I am, but I’m always nervous that checks won’t come in for a few months, and I’ll need the extra cash just to pay the regular bills.
Good luck!
Thanks Erin — well put! This will help with our upcoming budget meeting this week.
I’m a freelancer, too, so although intellectually I know that paying off the debt makes more sense, I’d be inclined to build a slightly larger safety net first, as long as you keep making payments on the debt as well.
Wow, this brings back memories of when my husband and I were younger. To pay our debts, we even sold our wedding silver when silver was at an all-time high because of the Hunt brothers. (Since then, we’ve always had a soft spot for the Hunt brothers, who went down in flames.) I’ve often thought that reining in spending was like creating a new set of habits — that you questioned everything you wanted to buy. The more you question, the easier it gets. Easier, but never easy. Best of luck on this — and keep us apprised on how it’s going.
I think all of us struggle with these same issues. Personally, I feel much better with a bigger cushion, so I tend to squirrel away money as much as I can, but I overcame my battle with credit cards years ago. My DH has non-mortgage debt. I do not.
I say it that way because we’re financially separate. Other than the house, which is in both our names, we maintain no joint accounts, no joint credit cards, etc.
Our deal is this: He pays the mortgage and the home improvement loan, plus his bills. I pay all the other household bills, plus any that are “mine.” Many of the dog expenses, for example, are in my court.
If I need help, he gives me money. If he needs help, I do the same, but our spending/saving habits are very different, so it’s just easier to budget this way … the big joint bills he pays don’t change, but with the many little ones I pay … I often have more flexibility to help our overall cashflow through expense leanness.
Our system works pretty well, despite income ups and downs, for everything except retirement savings, where I still struggle to find the cash to sock away long-term.
All that said, I can promise you that paying down the debt will give you a freedom you cannot imagine. It’s an amazing feeling, so I’d say sacrifice now and save later.
I save as much as I can as a cushion, which makes it tougher to may off my ridiculously high student loans – but I’d rather have a roof over my head and debt on the books, than develop an ulcer about paying rent!
Wow, these are great responses. Thanks everyone!
To clarify my case for the bigger cushion… it’s impossible to pay down credit card debt if you can’t stop accumulating debt in the first place. How depressing would it be to make a consisent payment for three months, and then eradicate it in one afternoon paying for an unexpected expense? It would be very depressing.
So the goal of the cushion is three-fold: cordon off the existing debt so we know what we’re dealing with, fix our much-blogged-about cashflow issues to eliminate the risk of growing the debt even more, and give us a more reliable monthly budget number to hit (by drawing down a consistent amount from savings) instead of reinventing the budget wheel every month based on current cashflow.
If we can stick with the forthcoming budget, the savings cushion will grow. And when it hits $7,500 (or whatever benchmark we set), then we can lop a big chunk off the credit card debt relatively painlessly — without worrying that we have no safety net should anything happen to, you know, break or need to be replaced or require nearly $3K in repairs out of the blue. (Make sure to check back tomorrow for another exciting chapter in the ongoing saga of “2009: The Year Everything Broke.”)
Since I’m a freelancer who doesn’t have a spouse’s income, I try to keep my own expenses as low as possible so that I don’t get into a sticky situation with the timing of checks and my bills. So far I’ve only had to dip into my savings once and that was earlier this year when my taxes were due around the same time I owed first and last month’s rent on a new apartment. Hopefully I’ll be able to replenish that money but now that I’ve spent it, it’s easy to find other reasons to spend rather than save (for instance, the new apartment needs a new couch to match, etc.) The unpredictablity of freelance checks is frustrating but there are other rewards that make it worthwhile.
We are struggling with having no savings too but we are **almost** out of credit card debt. I say put your money towards that. The credit card companies charge too much interest, have shoddy business practices, and don’t need our money. It’s really hard though. I often wonder HOW my children are going to go to college…
I would absolutely pay off the cards first. In an absolute *emergency* you could use the cards to cover expenses, but if the cash is not there (and instead paying off the debt) you’ll think twice about whether or not it’s an emergency.
Thanks Kris and Jennifer. Yes, we’ve already allocated a significant portion of our budget (starting May 1st!) to paying these off. At the same time, though, we’re creating a cash cushion so we don’t keep putting expenses on the cards. “Savings” is probably the wrong word for it; “cash reserves” might be a better term. Or “emergency fund” on top of budgeting for things like repairs, unexpected medical expenses, etc.
[...] I last wrote about our two- or three-year plan to pay off all credit card debt, we were struggling up Mount Savings, frequently buffeted by the winds of unpredictable [...]