Debt Vs. Savings

Dave Ramsay recommends this order:
First: $1000 "baby" emergency fund first.
Second: paying off all credit card debt,
Third: finishing 6 mos emergency fund of all monthly expenses.

Pay off the credit card debt smallest to largest. After the first one is paid, apply that min payment to the next biggest one, etc.

HTH.

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I believe what Suze Orman would say is.. once you have a $1000 emergency fund, stop saving and spend the money that you would save to pay off your debt, starting with the highest interest rate first. Pay the minimum payments on all of your debt except the the one that you have singled out as the highest IR and pay AS MUCH as you can on that one until it's paid off, and then move on to the next debt. Also, she doesn't consider a house payment necessarily debt (FYI). So anything you have above and beyond that $1000, use to pay your debt. THEN once all of your debt is paid off, go back to saving until you have that 8 month emergency fund! Hope this helps! Good luck!

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Get ready to read many, many posts about what Dave Ramsey says you should do. He has a lot of fans on Mamapedia and for good reason. You've gotta pay off that debt because it is sucking you dry with the interest you are having to pay! I didn't really think Dave's suggestion to pay off the smallest debt first (regardless of the interest rate) was the way to go. Wouldn't it make sense to get rid of the one with the highest interest rate? Well, we decided to do it Dave's way and the debt snowball got rollin' and we had debt gone and money saved in no time!!

Good luck to you!! You can do it!

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Suze Orman recommends paying off credit cards first, starting with the highest interest rate. Some people recommend starting with the lowest balance so that you get the satisfaction of seeing something paid off quickly and then move up to the next balance. If you cards are within the same interest rate range then that's fine but if you have something that's at a much higher rate than the others, you must pay that down first.

Mint.com is a wonderful (free and very secure - it's run by Intuit, the folks who make TurboTax) website. You set up all of your financial accounts and it automatically updates them every time you log in - no downloading, saving and uploading files. It's really easy to use and there's a credit card paydown wizard on there. It loads up the interest rates, minimum payments and balances on all of your cards automatically, then you determine how much you can pay in total each month and it tells you how much to pay to each card (basically the minimums on all but the highest interest card and that card gets all of the overage) and projects when each one will be paid off. It's really helpful to see it in black and white. We have been paying over the minimums on all of our cards but weren't being strategic about it so we would have had all paid off in early 2014. By following this recommendation, we can have them paid of in mid-2013 and that's with paying $100 less per month total than I am paying now. Sweet!

The other thing is that because you are single, be realistic about your job situation. If you are reasonably sure that you won't be laid off any time soon - or know that you will get severance for a certain period of time if that is a possibility - then work on the debt so that you can save aggressively when that's paid down. But if you think your job is at all shaky and you won't get a severance and unemployment won't cover your bills, perhaps you should save up a bit more to give yourself peace of mind (2 months, not 8), then tackle the debt.

Also, don't bother with savings or debt payments until you have life insurance. If you must choose, get insurance first and then tackle the other two.

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M.,
More power to you for working on this! That is awesome, especially as a single mom. Yes, of course you should be trying to pay down debt and increasing your savings. But for those of us who do have debt, the question is: what do I focus on first? From what I have heard, it is best to put money away in savings. In your case, are you able to put $75 a month in savings and then put the extra $25 towards your debt? The idea is that if you increase your savings every paycheck, 1) you get into the habit of saving and 2) eventually you can dip into your savings instead of using a credit card or going into greater debt for an emergency. The other thing I have heard is that if it helps you mentally, pay off your smallest debt first and then when that is paid off, apply the old payment (that you made to your smaller debt) to the next biggest debt. So for example if you were paying $20 a month on loan #1 and $30 a month on loan #2, then after loan #1 is paid off, you start paying $50 towards loan #2. I like that idea b/c it makes the idea of paying down the debt a little bit easier and it starts to go faster eventually. By the way, I personally don't know a lot of people who have 8 months worth of savings in their account so I don't think you are alone in that. Good luck to you! If you have any questions, please feel free to shoot me an email!
J.

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In my opinion you should get rid of the credit card debt first and foremost due to the high interest rates. Once that is gone you'll have a lot of money left over to out away.

2 moms found this helpful

Suze Orman rocks!!! All women need to watch her and listen to her advice!!!

You cannot think about college savings now, you have to spend within your means and get rid of the cc debt first. Then save, save, save! This will be really hard, and you must be committed to setting a strict budget...this will take awhile, but will be worth it! Also watch Clark Howard, he has great advice too!!! You can do this!!! Good Luck!

I am also single, without any support. Suze has helped me learn and grow financially! I have spent within my means, and only spend on what is needed, not what I wanted or the kids wanted. I have two jobs and now just starting to build up my saving account again for home improvements and an 8 month emergency account. I own my home outright, SUV is paid in full, no cc debt,-and I am now debt free! As for my children-college is a personal choice. If they want to go, they have to earn money for classes-this teaches children responsibilities-no free rides here... BOTH of my sons do not take out financial aid or student loans, are both in good jobs, going to college part time-and are debt free also.

Too many people I know who went to college; have nothing but $170+ in debt, anguish, and no high paying job to show for it...

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I just purchased a software program that figures it all out for you. It calculates which bills to pay first and cancels interest. My husband and I are both spenders. Really bad. There's no one to balance us out. If we knew money was coming in we already had it spent. I never had a savings account. Since I started this program I have over $10k in savings and 3 credit cards paid off. It's AMAZING. I have tried Suze Orman, Transforming Debt into Wealth, Secrets of the Millionaire Mind, and many others and have never had success. This program doing it for me has really worked.

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You should read Dave Ramey's "Total Money Makeover." He has a very easy to understand 7 step process for getting out of debt and building wealth. I would also recommend listening to his live radio show. You can find the station near you that carries it by visiting his website - daveramsey.com or you can listen to it online.

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Without hesitation, read Dave Ramsey's "Total Money Makeover". It's an easy read and is loaded with sound advice!!

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No, you should always save something, even if it's $50 a paycheck. Don't skimp on savings because you never know when you will need it. As for the debt, you really need to commit to NOT putting anything else on the credit card. Remove the card from your wallet if need be but DO put as much as you can afford on the card until you get it paid off. Find ways to save money in the mean time: maybe you are eating out too often...can save a bunch of money there; bill paying online or over the phone (saves money on stamps and envelopes...but DO make certain that there are no hidden fees for paying online or over the phone. I can pay my phone bill online for free but over the phone there is a fee. Same thing with my mortgage.) Sacrifice a little....maybe you could avoid buying yourself some clothes for a while; clip coupons. There are many ways to save money. You just have to look very closely at your spending habits.

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You need to have some emergency cash - about $1000 for when your car breaks down, your child is sick...something like that. If you don't have this, you will turn to credit when one of these situations come up, and then you'll never get ahead.

The "extra" money should be paid on your debt. By extra money I'm talking about the money that's left after you've paid all your bills, bought all your groceries and gas. Some suggest paying off the highest interest first, while some suggest paying off the lowest balance first. I work in the mortgage industry and we recommend never letting your credit cards get above 50% of their limit, so my suggestion is to pay all balances down to 50% of their limits and then pay off the highest interest (since that's what's costing you the most).

Also, call your debtors and tell them you're trying to pay off debt and ask them to lower your interest rates. Many times they will.

Once your debts are paid off, then work on getting 6 months worth of expenses into a savings acct (total expenses - mortgage/rent, food, gas, utilities, child-care). From that point you can look into college funds and other investments while continuing to contribute to your savings account.

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I will second what everyone says about dave ramsay. Follow his baby steps. Buy the Total Money Makeover, its the best money you'll ever spend on a book. Also, listen to his radio show! It's great information and is very inspring. He has archives of the show on his website, daveramsay.com. I bring earbuds to work and listen in the afternoon while I work.

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I've always heard to get rid of debt first. I paid off my credit card with the higher interest rate last month and paid the other down more than 1/2. Now the first minimum payment can be applied to what I was paying on the second. (Single too -inconsistent child support, debt from high prenatal care & nonpaid maternity leave). When I posted a question about credit cards a few weeks ago quite a few ppl mentioned Dave Ramsey - i might have to look into that!!!

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Okay my friends had ALOT of $$ in savings and I was jealous! So I asked him how to start saving and he said pay your bills (and your debt) and then take 10% off what's left over after bills, debt, and expenses and put in savings... even if it's $25 it is something! When your debt is paid off you can save more.

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Pay your debt first b/c you are paying a huge amount of $ on interest because of it. It's silly to save some money ($100 / month) and earn little to no interest (in today's economy), but continue to pay 18%+ interest on that money on your credit card debt. Pay your cc debt first, then focus on saving. Good for you for watching Suze & working on this!!!

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I agree, I think you should always try to save a little in case an emergency comes up. BUT I do know the recommendation is to get debt paid down first because the interest rate is usually high and you would never offset that in a savings account.

Definitely Dave Ramsey like so many others said, Suze orman is also great though. You need $1000 in emergency savings first and foremost, this gives you options if your car breaks down or an appliance stops working etc etc. Then work on paying off debt, having at least 6 months in emergency funds, retirement savings and college savings come last.

you do need more of an emergency fund first before you pay your debt. you need to have that available and set aside right now to take care of you and your little one/s' try for enought to cover 3 months of your expenses and then start paying down your debt.

I know you probably already feel stretched but people today feel entitled to so much. stop drinking soda and drink water, stop eating out or buying frozen foods. that sort of stuff. freecycle.org is great for giving away things you don't need and recieving things you do like clothes and toys for your children.

I've heard so much good about Dave Ramsey, and we have had tremendous gains from crown.org (often referred to as "your money map"). There is also a whole section of "tools" that can help in making and sticking to a budget and how long it will actually take to get debt free and things that i just have fun playing with sometimes :)
(they also push the $1000 in savings first, then move onto debt working from smallest to largest....)

I agree with debt first. I also think you need to be putting money into your 401k if you have one. Did Suze address that? Women in general are so unprepared for retirement, and unfortunately it's one thing you can't get a loan for, like you can for college.

Debt first, emergency fund 2nd. Good for you, you can do it!

Great question.

You don't mention what type of debt and how much interest you're paying. If there's anything that's high interest, I would get that paid off first before putting anything more into savings. If your debt is a medical bill that your making payments on (interest free), then I would put the money into savings rather than making additional payments.

As things get paid off, you can continue to add to the savings. If for any reason you need to take money out of savings (example car repair), my first priority would be to replace the savings.