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Pay debt right now, or put it in an emergency fund?
Old 01-30-2014, 10:30 PM   #1
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Pay debt right now, or put it in an emergency fund?

Hey guys, I have a quick question on what I need to do with some extra money.

I will have enough money to pay off my 3 credit cards, Walmart, Wells Fargo and Capital One. Right now it looks like this (balance/limit)

Walmart: 1370/2000
Cap 1: 1070/1300
WF: 80/600
Kay Jewelers: 0/7600
Lowes: 0/1500
GE Capital: 0/3000


I could pay off all 3 cards with a balance, BUT right now I have NOTHING in savings. No emergency fund at all. I have a 401k with about 4k in it but I am not touching that.

So Should I put some money in an emergency savings and then make payment to these cards, or should I pay them off completely and start saving every month to build it up? Or should I combine both and pay a little down on the credit cards and put the rest in my savings?
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Old 01-31-2014, 12:32 AM   #2
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I think that the usual advice I have heard, is to establish an emergency fund first, and then pay off the credit cards. It's great that you are working on these goals.
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Old 01-31-2014, 12:34 AM   #3
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What's the interest rates on the cards? How secure is your income?

If your income is really secure, then I'd pay them all off and then quickly rebuild your savings. Otherwise, I'd split it 50/50, paying off the high rate cards first and I'd keep doing this with incoming cash until they are paid off or you have enough savings and can redirect all your extra cash towards the credit cards.

I'd also look for 0% balance transfers if you qualify. That would be a great way to save up cash while not paying high rates. But I would work hard to pay them off before your rate increases.
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Old 01-31-2014, 03:10 AM   #4
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Part of it depends on what the emergency fund is for. If you own a house, you need funds to replace a furnace or roof since those are not optional. If you own a car you need funds on hand for major repairs like the transmission failing.

If you don't have those obligations you can get by with a smaller emergency fund, but not zero. Medical stuff can happen any time and lots of people laid off from their jobs never saw it coming.

Even if things are stable I'd lean toward having the emergency fund first just because Murphy's Law dictates that stuff happens when one is least able to deal with it. Then work on paying off the highest rate cards first and then tackling the others.
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Old 01-31-2014, 07:49 AM   #5
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Pay off the WF and Cap 1. 2 out of 3 is a good start. Put rest in emergency fund.
Close the Kay Jewelers. Payoff Walmart card, then up your 401k as much as you can. Read this forum and do the finance basics and your net worth will grow.
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Old 01-31-2014, 12:27 PM   #6
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Assuming the credit card interest rate is high, and you won't use a 0 balance as an excuse to spend more freely, I would pay off the credit cards. It also assumes you don't have regular emergencies, like a car that often breaks down.

It's tough to get ahead when you have credit card interest. In an emergency you can usually use your CC if you have to anyway.

Again, it really assumes you will be disciplined and not let your CC balances climb again.
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Old 01-31-2014, 12:38 PM   #7
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If your job/sources of income are stable, I would pay off the cards (assumes they are high interest rates). If you have an emergency before you have a chance to rebuild your emergency fund you can always use the credit cards to fill that need.

If having no emergency fund makes you uncomfortable, you could go 50/50 as kiki suggests.


If your 401k doesn't have a match, you could pay the credit cards, suspend your 401k contributions to build your emergency fund and then resume 401k contributions once your emergency fund is built up.

No matter what, stay away from carrying credit card balances that charge interest - that is a wealth-killer!
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Old 01-31-2014, 01:33 PM   #8
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How long will it take to build up $2.5k for your emergency fund if you pay off all your debt now? Something like 3 months, with everything looking stable for now, and I'd pay everything off. If it's more like a year then I'd hold something like $1k for the emergency fund for car repair or medical deductible kind of stuff, and pay off the highest interest rate cards first. The following months, top off the emergency fund if necessary and use the rest to continue paying down the cards. Near the end, you can again think of dipping into the emergency fund to pay off a little quicker and then refill it in the next 2 to 3 months.
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Old 01-31-2014, 02:10 PM   #9
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Unless you can pay your rent with a credit card, I would build up the emergency stash first, or, at a minimum, do both things concurrently
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Old 01-31-2014, 08:27 PM   #10
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Quote:
Originally Posted by TimSF View Post
Unless you can pay your rent with a credit card, I would build up the emergency stash first, or, at a minimum, do both things concurrently
In an emergency you could take a cash advance to pay the rent.
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Old 02-02-2014, 09:27 AM   #11
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Quote:
Originally Posted by gladx4 View Post
Hey guys, I have a quick question on what I need to do with some extra money.

I will have enough money to pay off my 3 credit cards, Walmart, Wells Fargo and Capital One. Right now it looks like this (balance/limit)

Walmart: 1370/2000
Cap 1: 1070/1300
WF: 80/600
Kay Jewelers: 0/7600
Lowes: 0/1500
GE Capital: 0/3000


I could pay off all 3 cards with a balance, BUT right now I have NOTHING in savings. No emergency fund at all. I have a 401k with about 4k in it but I am not touching that.

So Should I put some money in an emergency savings and then make payment to these cards, or should I pay them off completely and start saving every month to build it up? Or should I combine both and pay a little down on the credit cards and put the rest in my savings?
Since you have money to pay the first three cards, I assume you must have at least $2,520. The basic best answer would be to pay everything off since your paying a higher interest rate on the borrowed money than you're probably getting on the $2,520.

As an alternative, you can payoff Walmart and WF and transfer the balance of the Cap One card to a zero interest card, then use the payoff funds you would have used for the card as an emergency fund. If you can't do the 0% interest transfer, then use $700 of the remaining funds to pay down the Cap One card and use what's left ($370) as a small emergency fund. Try to refrain from using the charge cards. Establish a reasonable budget and try to live at or below your means.

Good luck!
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