Should I put money into savings or pay bills?

Question

I will be receiving a bonus at work that will be worth about $5000...My plan was was to put $2000 into my savings account and then use the other $3000 to pay off credit cards. I have $3200 on one card, $2700 on another, $600 on another and $2600 on another...My goal was to pay $500 on the $600 card....$1000 to pay off a car...and then use the remaining $1500 to pay on the highest interst card...the $3200 card.

Should I pay things this way or should I not put so much in savings and then pay more on the cards?

I will also be receiving another $8000 bonus in February in which I would again put $2000 in savings and use the remaining $6000 for the cards.

Wow thanks a lot!!

I currently dont have any money in savings...recently bought a house and got married (hence the high credit card balances). I'm afraid that if I put nothing into savings then if something happens we will be in a bind...Maybe Ill just do $1000 in savings as opossed to $2000.

Thanks for all the help!

I also should note that the reason for the high balances is because of college...I haven't used three of the cards since I left college 4 years ago. I have been paying everything with cash ever since and I make enough money now where I don't need the credit cards but I'm just concerned that having nothing in savings will hurt me in an emergency.

One thing I didn't mention was the fact that I am still putting 8% of my pay into a 401K and my company matches all of this as well. So, I am saving for retirement just not saving for now!

Answer 1

Unless you absolutely need to have that money in savings, just in case something happens, I would put it ALL on the credit card. I would pay the minimum payments on some, and then pay off the highest interest. You are paying monthly fees to finance this money...why pay that amount if you don't need to?

Answer 2

Depends on the interest you are paying on the cards, really. If one of those is a store card where you have a same-as-cash plan and are planning to pay it off during the promotion period, then don't put any extra on that one.

However, unless you have nothing in savings at all, I would put it on the credit cards (putting the most on the cards with higher interest rates and working down from there). If you have no savings, you need to save a little bit for future emergencies (that way you can pay cash and not finance them), but still put the majority towards the cards. No sense in sitting on money earning 5% or less when you could use it to pay off bills (which will "earn" you far more than 5% by saving you on interest).

It also depends on how much self control you have with spending, too. If you can pay off the cards and then start putting those payments into savings, then that is an option. But, if you are likely to just pay off the cards without saving anything, and then using the money you are currently spending each month on credit card debt to buy more stuff (instead of saving it), then you definitely need to save first.

Answer 3

First things first. Get on a written budget. If you haven't done that already, you can gain complete control over your finances by doing it. Money will go farther and you can pay off debt quicker.

Second, you need $1000 - 1500 in the bank for emergencies. Since you don't have anything in the bank right now, do like you said and put at least $1000 - 1500 in savings. I wouldn't argue too much with $2000. You want to maintain this amount because when emergencies happen, you can pay for them instead of borrowing. So, if you use some of the emergency fund, build it back up ASAP.

Third, start paying off your debts smallest to largest. You could make an argument about interest rates and paying off the highest first, but if we were thinking logically all along, you wouldn't have this debt to begin with. ;-) (BTW, been there, done that). The key is that all humans need encouragement. Taking a long time to pay off the highest dollar, highest rate debt doesn't encourage us because the end isn't in sight. As you pay off the smaller ones, it encouraging to see progress.

Pay as much as you can towards the smallest and the minimums on the rest. After paying off the smallest, roll the full amount you have been paying on it into the payment on the next largest. Once that one is paid off, you will then be rolling the payment amounts of the first 2 debts into the 3rd. This is the debt snowball that Dave Ramsey teaches.

Apply your bonuses in the same manner. After putting aside your emergency fund with the first bonus, use all of the 2nd bonus for debt.

Answer 4

My advice is to take the entire 5000 and pay off the highest interest rate CC, then cut it up. whats ever's left use it to pay the next highest interest rate, and cut it up, while doing this pay the minimums on the other cards only. Tackle one card at a time and keep doing it until your debt free, then take the money that you would be paying towards debt and begin a savings account, once your savings account equals two to three months of your salary stop saving and begin investing. Talk to an investing accountant at your bank, they'll be able to help you out.
Doing this is difficult, but it is the best way to spend the cash, don't put 17% of your money into someone elses pocket and while only collecting 2% in the bank, it doesnt make sense. Your goal s to eventually get your money working for you, not your creditors.

Answer 5

ALWAYS PAY YOURSELF FIRST. You will always have bills. Plan now for a comfortable retirement.

Take 10% of every check you earn (including your BONUS)and put it into a savings account. Set up automatic deductions from your checking into a high interest bearing savings/CD or money market fund. Read The Automatic Millionaire by David Bach.

This is a GREAT opportunity to start a habit that will make you VERY rich if you commit to it.

I also agree that you need an additional account for little emergencies (around the house - car - or sudden unemployment - health etc) Do an additional 10% into this account until it equals 6-12 months of your total monthly expenses. Then let it collect interest.

The remaining 80% is for your expenses.

Answer 6

Hey Track,

When I advise clients on this type of thing, I advocate a 90/10 approach. Put 90% of your disposable, "extra" income into debt relief. That is essentially guaranteed return on your investment (the reduction of interest you're paying) and it helps create more cash flow down the road as debts vanish.

The other 10% should be saved, first with some "rainy day" money (maybe about 3 to 6 months of income at the top, in a regular high-interest money market fund) and then by contributing for retirement in your employer's 401(k) or a Traditional or Roth IRA.

What happens is that the 90/10 split eventually means you're getting more free cash flow as debts get retired, and your 10% becomes larger as you have more disposable income. When your debts are eliminated, you can then divide up ALL of the extra money into various savings "pots" (the rainy day fund, the 401(k) your Roth IRA, etc.)

Just some thoughts...

Answer 7

It's entirely up to you. In my opinion it depends on how the rate of interest is. I currently work for a bank, and our savings account rates are a measly 0.5%. So you will not be making much money on the savings. CD's are about 5.10% which is a lot better, but then you are also taxed on the interest.

I would assume that the credit card rates you are paying are between 15% and 28%. So unless you have an investment opportunity where you can recieve that much interest, you should pay off the credit cards with the highest rate of interest first.

You are going to have to invest in some volatile stocks if you wanted to earn a good rate of return, which means they are risky, and you could possibly loose money.

So depending on the rate you pay on the cards, I would pay off the credit cards with the highest rate of interest.

Answer 8

Depending on the interest rate on your savings account,
your plan sounds great! But if your highest interest charge card charges double the amount of interest your savings
account pays you, it might be wise to place another spin on
your plan. Now remember it is the rate I am speaking about,
not the the amount of interest you pay per month. But regardless, put at least $1000.00 in savings. When you have a handle on the charge cards, you will be able to pay the full balance every month on at least 2 cards, cut one in half,
and be paying off the one with the lowest interest rate.
(That way you can use the card, pay almost nothing, and get free airline miles, and other benifits for just using and paying the card!)

Answer 9

Pay the entire highest interest cared off and cut it up. Put the remaining into savings. On the next bonus, pay off the rest of the cards. Meanwhile, pay cash. Get rid of those cards. Plan to keep one for emergencies only.

Answer 10

Put $1000 in your savings account, and use the rest of the money to pay off the cards with the highest interest rates.