The family is coming into a little bit of cash soon. I want to know what to do with it. We're getting a little over $60K after taxes, etc. Here's a breakdown of some of our debts: 1. Still owe $166K on the house, at about $1400/month in the mortgage (including insurance/taxes). 2. Still owe $8K on one of the cars (other is paid off). 3. About $20K in mid-level-interest credit cards. 4. About $10K in low-or-zero-interest credit cards. We don't have any student loans or other crushing debts, but just paying the minimums in our current situation is really spreading us thin. Should I just go ahead and pay off the credit cards, keep the car payments where they are, and save the rest? And if I'm saving, how should I save it? Money market? CD? Any thoughts?
Kill the cards for sure. That's a no brainer. Then I'd put $20k toward the mortgage and put $10k in an emergency only fund in a savings account. The reason I'd put $20k toward the house is that it will be very hard to touch that money after the check clears. If you pay off the car, you might just end up spending the extra cash on misc BS every month. If the car payment remains, you'll still be in debt reduction mode until the car is paid off. How secure are your jobs? If there is any chance you'll be getting laid off any time soon, I'd keep $30k in the emergency fund and leave the house note as is. Bernard
Good for you all. Paying off all your credit card balances (starting with the highest interest-rate cards first) is a no-brainer. Presumably your zero-interest credit cards are in some kind of intro/teaser period and aren't going to be that way forever, so ridding yourself from credit debt makes absolute sense. Paying off your $8K car loan also makes sense, although it could depend on your interest rate and # of months remaining. Unless you have one of those really low-interest car loans (for example, a Toyota or Ford 2.9% interest loan), you should think about retiring it early also. As for the remaining $22K-$30K, saving it certainly seems wise. You should probably keep at least half of it ($11K to $15K) liquid in money market funds or CD's, even though yields are pitifully low right now. Personally, I prefer money market savings accounts over CD's because CD's have stiff penalties for early withdrawal and CD yields aren't much better than money market funds to begin with. CD rates Money market rates If you want to be a little more aggressive with your remaining funds, you might (or might not) want to consider some foreign curency ETFs (exchange traded funds). You could consider something like UDN, which should appreciate in value if the U.S. dollar continues to fall against foreign currencies (e.g. Euro, Japanese Yen, British Pound, Canadian Dollar, Swedish Krona and Swiss Franc). Putting a little bit into gold could be a good long-term hedge also. Yahoo Finance - UDN If you want to be even more aggressive, there are always stocks and stock funds. As a personal opinion, however, I would be cautious about investing too much fresh money in the U.S. stock market right now. The Dow hit 10,000 today for the first time in over a year, which is great. However, there are some questions/doubts as to whether the real economy and corporate profits have recovered to an extent remotely resembling that of the stock market recovery. I would argue against paying down your mortgage balance since: (1) Interest expense on mortgage debt is tax-deductible, (2) If you apply the money to paying down your mortgage, getting it back out again will be *very* difficult if you ever end up in an emergency situation (where you need money). You would basically have to apply for a home equity loan or refi your house to get any of the money back out (which would take lots of paperwork and probably a home appraisal). Anyways, paying off all your credit card (and auto loan) balances and stashing away most of the remainder in money markets or CD's (as you were thinking) seems like a sound course of action.
Could someone tell me what "good debt" is? Seems like it's better to not have any debt at all. I make $300 a week and I don't have any debt. It's not a necessity for living. You just don't buy things you don't need, and don't buy anything until you have the money. Actually, I've wondered something for a while. Most people have some sort of debt for most of their adult lives (house payments, car payments, etc), and also have some sort of savings account at the same time (college fund, 401K, etc). The banks have to make money, so chances are the interest rates on your loans are higher than the interest rates on your savings. Wouldn't it be smarter to take some money out of your savings and just buy things without loans or financing? Seems like you'd come out ahead in the end by not playing their game and letting them take their cut. I also have similar thoughts about insurance. They have to make money, so the returns will come out to less than the investment. Better to just save your money for a rainy day? Or do you buy insurance because you think you won't have the will power? In fact, insurance is pretty similar to gambling, if you think about it, and aside from entertainment, gambling is pretty stupid.
What kind of insurance are you talking about? If car or house you are required to have it if you are financing from a bank. If you own them then you still need the insurance if their values are anything significant b/c most people don't have cash reserves to pay those balances when worst comes to worst. I agree with Bernard. pay off credit cards and then close those lines of credit. That is way way too much credit in my mind and you need to get out of the habit of doing that. Then put some on the mortgage and some in cash reserves (Money market or CDs) based on what you need for cash reserves.
My thoughts would be, 1. pay off the high interest credit cards 2. put the equivalent of 6 months salary in an account that could be easily accessed, anytime without penalty (rainy day fund) 3. The remainder into something that produces the highest yields possible over a long period. This is assuming that you can still live comfortably with your mortgage payment and car payment. I also going under the assumption, that both the mortgage and car loans have very low interest rates. (historically) It makes no sense to pay down your low interest debt (home/car), when you can take your cash and make it work for you and hopefully earn a higher interest rate. (Unfortunately, easier said than done these days with generally low yields across the board)
Good Debt: Mortgage. Assuming you a) buy a resonable house & B) you're alternative is renting. You can typically purchase a small to medium sized house and your monthly payment would only be slightly higher than rent for comprable sq. ft. Basically, instead of a monthly check to a landlord, your would be putting (part) of your payment back into your own wealth
there is no such thing as good debt in a bad economy. in a good economy business debt that allows you to make money can be good, but the economy is fickle and so is debt. from a business standpoint, debt is a tool, actually an amplifier -- if times are good, debt amplifies ROI, if times are bad, if sucks you down even quicker. as for the OP, bernard has the best advice, nothing to add from my perspective.
You should buy a copy of Dave Ramsey's "Total Money Makeover" and follow his advice (i.e. get rid of all your debt) Congrats on your chance at getting rid of most of your debt (except for maybe your mortgage).
Agree pay off the cc and do not ever get into that much cc debt again. I would keep the balance liquid in a money market, flex cd or savings account. Ally is offering some great rates and options. The Link
"Getting back to the OP, how did you manage to run up $30k in credit card bills to begin with?" It's not hard. The wife was out of work for 7 months when we accrued a lot of the debt, then had a job for a year. Then she stayed at home for another stint when she had the baby and we didn't have any cash to pay bills. We cut out the nonessentials and still racked up most of that $30K pretty quickly, mostly on bills like electricity or food. It's not like we were blowing it on coke or anything.
Pay off the CC debt and the car. I'd pay off the car b/c it would allow you to drop insurance down to liability, which will save you another 75-100 a month. Put that money in savings to use when you're car breaks down or so that you'll have cash in a few years to buy a newer car when the other one is driven into the ground. Don't cancel the cards b/c that will make your credit score drop, but do something with them so that you can't use them w/out serious though-- like free them in a cup of water and leave them in the freezer. Whatever you do, don't carry them. You'll still have 30K left over, which is why you could go to liability on the car. Now, I'd do something special for yourself-- maybe like 5 K of it-- take a trip, buy some new furniture, something that will be special for you and your family. Then, take the other 25K and stash it away, someplace where you have to do some work to get it, but it's accessible. It's always nice to have a rainy day fund! Now, if you've made it this far in this post-- ha ha- I'm going to preach a bit. You've essentially been given a "get out of jail free" card on your debt. Don't waste it. Someone above suggested buying "total money makeover" to help you-- it's a great book that will give you a lot of suggestions to help you take control of your money. Having control over your money will improve your marriage ten-fold. Get yourself a budget so you don't end up chipping away at the 25-30K and end up in the same place in a couple year!
I'm reading this on my iPhone so the screen was set up to maximize the size of the text in the post --meaning I couldn't see who was posting what as I read. My first thought as I read the OP was, "I hope Bernard reads this because if this were me i'd do whatever he advises".
1. Pay off the cards (cut them up, as well...but don't close the accts) 2. Pay off the car (interest expense on a depreciating asset...ouch!) 3. Put $5,000 in your family's "operating" acct 4. Put remainder in the highest yield savings acct or MMA you can find 5. For God's sake, don't even think about picking up a credit card again unless your very life depends on it...don't squander this great opportunity to get consumer debt out of your life forever...it's wonderful to know that your paycheck is for you and not the credit companies. Once you have done the above, then: 1. Replace the cut up credit cards with a Visa debit card on your "operating" acct 2. Divert the money that you had been paying on the credit card debt and car debt to the high yield savings or MMA until it reaches a balance equivalent to 6 months of your family's living expenses 3. Once you have achieved the balance equivalent to 6 mos of livng expenses you may reduce insurance coverages for car, but not on House or Health 4. With above accomplished, divert the monthly amount once used for car payments and credt card payments to college funds for kiddos and/or retirement investment accts. I would not pump any of the windfall into reducing debt on the house, at least not until I had done all of the above. The neat thing is that once you eliminate your installment and revolving balance debt service obligatins you will see a big jump in your monthly net cash flow...that's when you can truly start to build your wealth. Hope that didn't sound too preachy, but that it did come across with conviction...As a guy that once upon a time went through hell to get rid of over $70k of credit card and car loan debt on less than $50k a year salary...well, just please take my word on it...you will never regret not picking up another credit card again...it is great having a paid for car...you get to control your life and send an awful lot of stress out of it.
Definitely pay off the credit cards first. You should probably also compare the interest rates for home loans to the one that you have now and consider using some money as a down payment if it makes sense to refinance and possibly get out of paying PMI. Stash what is left over in an emergency fund.
It is threads like this that makes me proud of Hornfans! There isn't much to add, but this. Get yourself a financial planner. Get someone who is a professional who can help you build your portfolio. Personally, I have a Edward Jones guy and love him, but pick whomever you want and whatever company, but it will be WELL worth your time. Also, you can not only get the Dave Ramsey book, but many organisations offer his class, 'Financial Peace University.' My church is going to offer this for the first time in January, and I have been amazed at the interest in it, especially among young families, which it sounds like you are.
