debt question - wwyd

[mousefanmichelle]

I have a question for you wise budgeteers - my dear friend and her husband were gifted 10grand. They have 10grand in credit card debt and no other savings to speak of - they live pay check to pay check right now and are concerned about their jobs (as a lot of people are). She asked me this question last night and I just didn't know what to tell her. It's such a personal decision. They have small kids and a house - things happen all the time and they have no where to go if they need money after that 10 grand is gone.

Senerio:
You have $10,000.00 in credit card debt &
You have $10,000.00 in savings

Do you pay all of the debt off with your savings and begin to saving what you were paying monthly? It would take at least 2 years of saving to get back to the 10grand balance.


TIA!

 

[clarabelle]

I would do half and half
Pay down the highest interest cc and put the rest in the highest bearing interest account I could find

 

[EthansMom]

I agree with the PP. I would put about half in savings (for emergency) and half to pay off the debt.

 

[friendofgusgus]

Another vote for half and half - making sure to pay off the highest interest rates first!

 

[Justsyd2]

I concur. Halving it helps with the debt, and provides a back up.

 

[TRICKY_TINK]

I would want all the debt gone if it were me.

 

[PatsMom]

I'd pay off all the debt and then allocate the monthly payment amount to savings. In an emergency you could always access the credit card again and in the meantime you are saving all that interest. If no emergencies arise, then you are much better off.

The big gamble right now is that the credit card could be involuntarily terminated.

 

[ashleyd725@hotmail.c]

I would say pay off the credit cards for sure! This way they will not have those extra payments every month, they also wont be paying a TON of interest, if for some reason an emergency would come up, something REALLY BIG, not something they could just scrimp and save for during the month, then they have the credit cards with a zero balance that they could use.
The payments that they were making can go into savings...
Just my thoughts
I would LOVE a gift of $10,000

 

[HeyIt'sMe]

I also vote 1/2 & 1/2.

Just the other night I was reading a magazine's money section and a couple didn't know if they should use the extra $500/month they had to pay off debt or put in savings. The financial person that answered the question said to do both alternately - one month put $500 against the debt, next month put $500 in savings and so on and so on. So I'd assume the answer about what to do with the $10,000 would be to split it. But that's just a guess.

 

[katied]

It depends on what their monthly budget it - I would allocate at least 3 mo (better to allocate 6 mo) living expenses - so if they spend $3K per month, then all should really go to savings. The problem with paying off all debt is that if you hit any trouble (job loss, medical problems, etc) your credit can quickly evaporate, so you cannot re-borrow on credit cards or other lines. So, having 3 - 6 mo in savings is key. After that, they should start a plan to pay down the debt.

Just my opinion...

 

[JeMarie6]

I'd keep $1000 in savings for true emergencies, pay off $9000 in CC debt and then start ramping up the savings once the CC debit is gone. If you put it all on the CC debt though, the tendency is to just go out and spend more and start racking up the CC debit again...

 

[adventure_woman]

I too would put a chunk in for savings - but only for emergencies! Also, make sure they put money aside for the taxes (I don't know what they would be, but my guess would be at least 30%)

 

[mousefanmichelle]

I think I like the idea of 50/50 - put 50% on debt and keep 50% in savings. I would hate to see them not have anything just in case because you never about about the just in case. I'll share that with them and hopefully it will put their mind at ease a little bit.

 

[Ginamarie]

The smart thing to do is pay off the debt, because that goes up SIGNIFICANTLY if it's on a credit card (unless they're in a 0% period). If they have no money in savings, it would pay to keep a little bit in savings ($1000-$2000) in case of emergency, but the rest I'd use for the debt.

 

[Chicago526]

It really, really depends on a lot of factors.

1) Why are they in CC debt to begin with? Spending too much, medical bills, job loss, pay cut?

2) Why are they pay check to pay check now? Have they cut everything to the bare bones, are they still spending to much on friviolus things? Medical bills, repair bills?

If they are still spending way too much on wants instead of needs, my fear is that if they use all of the $10k to pay off the CC's, they run it back up again in just a few months. However, if the debt is due to emergency spending OR if they have since cut way back on wants and have shown that they have the dedication to stick to a budget, then I'd feel better about them using most of the $10k towards paying off the debt, and then using the freed up CC payments to build up savings.

 

[ceecee]

Half to the debt and half to savings. Stop charging totally and then cut expenses so as not living paycheck to paycheck if possible. Then work on paying off the remaining debt.

 

[jdes88]

I would do 75% towards bills and 25% towards savings. Yes paying bills down feels good, but having $$$ in the bank is a great feeling too!

 

[robinb]

Hmmm ... what concerns me is that your friends are living paycheck to paycheck and they are worried about their jobs. If they lost their jobs their focus should be house and food and the CC companies can go hang themselves. I would keep more than 1-2K in reserve. I think I would keep at least half to cover expenses if one or both of them lose their job.

As for the CC debt, 10K is a lot of debt. Maybe they can take 4-5K and try to work out a a lower forgiveness amount (I forgot what it's really called) for their CC debt if they offer to pay a lump sum.

 

[lulubelle6188]

My husband and I were in the same boat kinda. We had 5k in cc debt and almost 7k in savings. We so bad wanting to pay it off. It's almost all on one card with a couple hundred on another. Well, every other card we had got cancelled because we didn't owe on it and these were lowered to what we owed. A couple of weeks later my husband was laid off. We didn't pay any on our debt and we are glad. I understand we will end up paying more but at least we are getting by now. Our fear was if we paid if off they would cancel it and we would have no savings or available credit. Without that savings we wouldn't make it. It's stressful having that much debt but it's worth it to know I have enough money to pay the bills each month. Oh, and my DH started school and the savings is enough to make up what he was making with unemployment until he gets out! It's a personal decision though.
Tiffany

 

[Disney Doll]

I would do half and half
Pay down the highest interest cc and put the rest in the highest bearing interest account I could find

I'd do this.
And then I'd take the credit cards and put them in a Tupperware container, fill it with water and stick them in the freezer. That way, if I absolutely needed them for some emergency, they'd be there...otherwise I'd be paying cash only.