Personal Finance Advice/Help

[uh-arc]

Hello everyone,

I just turned 31 and I've been working on getting my FICO credit score up (@ 726 now) and reducing my debt (like all of us), but I need a little advice on a financial issue.

I have about $14k of credit card debt (68% credit utilization!), $80k in student loans, an $8k personal loan as well as a mortgage. My monthly payments are about $650 on CC's (paying more than minimum), $600 on SL, and $200 on the personal loan. I am also actively contributing to my company 401K & Roth 401k. I also don't have an emergency fund since I've been working to pay off debt and make about 4k/month NET.

I am about to receive about $15k lump sum of money and am unsure how to allocate this money to my finances (or investment). I thought about just putting the whole thing towards the credit cards but don't want to spend this if there is a better way to make the money work for me.

Any thoughts/comments would be greatly appreciated? Thanks!

[InvincibleSummer3]

---

@uh-arc wrote:

Hello everyone,

I just turned 31 and I've been working on getting my FICO credit score up (@ 726 now) and reducing my debt (like all of us), but I need a little advice on a financial issue.

I have about $14k of credit card debt (68% credit utilization!), $80k in student loans, an $8k personal loan as well as a mortgage. My monthly payments are about $650 on CC's (paying more than minimum), $600 on SL, and $200 on the personal loan. I am also actively contributing to my company 401K & Roth 401k. I also don't have an emergency fund since I've been working to pay off debt and make about 4k/month NET.

I am about to receive about $15k lump sum of money and am unsure how to allocate this money to my finances (or investment). I thought about just putting the whole thing towards the credit cards but don't want to spend this if there is a better way to make the money work for me.

Any thoughts/comments would be greatly appreciated? Thanks!

---

For me, the interest on my credit card debt vastly outstripped anything I could get back by investing. If it were me, I'd pay off the cards. Maybe use a little ($1-2k) to set up an emergency fund. Having the credit cards paid off means you'll have more money to pay on other debts as you move forward.

[Anonymous]

I agree with the above.  Knock out the credit card debt completely, and put all or some of the $650/month you were paying on them toward the personal loan to pay it off more quickly, then you have an extra $850/month. . . You see where this is going.  With an extra $850/month, you can allocate some of that toward building an emergency fund, paying down the student loans ($850 a month in addition to the $600 you're paying now is going to cut your repayment period by a substantial amount of time), paying down the mortgage, etc., and you'll wind up in a MUCH better financial situation in as little as 6 months.  

That's what I would do, use the $15k to kick-start an accelerated debt repayment program (Debt Snowball) and get an excellent start on the road to a debt-free life.

[checkach]

I disagree about one thing. I would pay off the cc, then put the rest in an emergency fund. That way, you are less likely to have to use the cc in the future. Take the cc payment and add to the personal loan, which will be gone in less than a year. Then beef up emergency fund and finally top off the retirement funds. One caveat - make sure you are contributing enough to the 491k to get the match, and consider a Roth IRA which can also double as an emergency fund.

[Anonymous]

I'd want to know the interest rates on the credit cards and the personal loan before answering. I think everyone assumes that the rates are higher on the cards, but it's possible there might not be that big of a differential. Who knows? 

(Assuming the CC's ARE higher interest) I'd definitely keep between $500 and $2k as a cushion/emergency fund so you don't use your credit cards when the slightest thing throws off your plans. If that means leaving $1-2k on your cards for a couple months, I think it's a reasonable trade off. And then once you get those knocked out, on to the personal loan...depending on your other goals and needs. 

If you had to leave $2k on a CC and the interest rate is is 20%, and it took you 4 months to pay off that $2k, it'd cost you less than $150 in interest. And you could get used to letting money sit. It's a good skill to learn. I've had to learn it a few times.

[compassion101]

I'd absolutely put the first amount toward an emergency fund if you are truly living paycheck to paycheck. Then, assuming interest rate are typical for CCs I'd use the rest to pay off as much as possible and then try to get a zero percent card and transfer the rest.

You need some sort of money behind you. How much depends on other emergency sources. Sources you don't want to use but can use rather than be out on the street such as roth, 401k, rich parents, home equity, etc. The more you have of these the less months that I would suggest for an emergency fund before paying CCs. For instance if you have 10k in a roth IRA that you can take out without tax penalty then I'd say a month or two emergency should be put aside before payin the CCs. Remember, CCs can be taken away from you at any time so don't rely on them for an emergency.

[vanillabean]

If it boils down to emergency fund vs credit card debt, Suze’s Surprising Credit Card Controversy may be of interest to you.

[Anonymous]

$2000 into an emergency fund, the rest towards CC. No doubt in my mind that is what I would do. You'll have the remaining CC debt knocked out in two months.

[uh-arc]

First, thanks to all who responded! It was very helpful and gave me different scenarios to think about. It looks like the main issue/dilemma to address is the CC debt and emergency fund. I have 4 different cards with an average interest of 13.5% (lowest being 12.90% and the highest 14.99%).

After much thought, I've decided to put $2k into kick starting an emergency fund (which equals to about 1 month of expenses/bills). Then allocate the rest to paying off the credit cards. That would leave me with $13k going towards paying off the CC's. With that, all but one card would be 0. I have a small personal plan in place to avoid spending up the credit cards again.

The next issue after the above would be the $8K personal loan. Since I would free up the $650/month going the CC's, I will shift $500 of that to the PL and $150 to building the emergency fund. I would be done with that by next year...leaving only the student loans to knock out (snowball effect = same strategy).

[Anonymous]

---

@uh-arc wrote:

First, thanks to all who responded! It was very helpful and gave me different scenarios to think about. It looks like the main issue/dilemma to address is the CC debt and emergency fund. I have 4 different cards with an average interest of 13.5% (lowest being 12.90% and the highest 14.99%).

After much thought, I've decided to put $2k into kick starting an emergency fund (which equals to about 1 month of expenses/bills). Then allocate the rest to paying off the credit cards. That would leave me with $13k going towards paying off the CC's. With that, all but one card would be 0. I have a small personal plan in place to avoid spending up the credit cards again.

The next issue after the above would be the $8K personal loan. Since I would free up the $650/month going the CC's, I will shift $500 of that to the PL and $150 to building the emergency fund. I would be done with that by next year...leaving only the student loans to knock out (snowball effect = same strategy).

---

That sounds like a phenomenal plan!!! Way to go!!!!!!!!!!!