Pay credit debt with savings?

[martinb5]

Here is my situation. I have $3,000 in credit card debt spread over two cards.

WF $1480 at 14.65%
USAA $1550 at 9.9%

I'm 20 and live at home with my parents, and accumulated the debt over the past few years mostly just being an irresponsible teenager and living beyond my means. I make around $1k a month working part time and just recently tried to start putting away some $ in a savings account, with an automatic withdrawal of $25 twice a month from each paycheck. So far I have just $350.

My question is, should I continue this method of saving and try to pay off my debt at the same time? Or should I focus only on paying off my debt and take the $350 I've saved so far to one of the cards (probably the WF first). I'd hate to see nothing in the savings account but having this debt keeps me up at night. I'm not sure what to do, especially since my "savings" will only take a small chunk out of my accumulated debt.

[disneysteve]

Welcome to the site. Can you give a bit more info? Why are you only working part-time? Are you in school? What are your fixed monthly expenses?

Without any more details, it certainly makes more sense to pay off high interest credit card debt than to put money into a low interest savings account. Your savings might be earning 1-2% but your debt is costing you 9.9 or 14.65%. I'd be putting every spare dollar toward the debt. I'd also be looking to boost income and slash expenses any way you can.

[martinb5]

Yes, I am working part time because I am enrolled in the local community college, hopefully I will be transferring to a 4 year school soon. My monthly expenses are

$190 Car payment
$180 Car insurance

And my parents have been kind enough to take care of everything else since I made the decision to go back to school. The rest of the money I have left over seems to be used up by random expenses, gas and food primarily.

[disneysteve]

I make around $1k a month

My monthly expenses are

$190 Car payment
$180 Car insurance

The rest of the money I have left over seems to be used up by random expenses, gas and food primarily.

You earn $1,000/month. You have $370 in fixed expenses. That leaves $630/month. That's a lot of money in your situation. Even if you spend $100 on gas and $100 on food, that still leaves over $400/month unaccounted for. You need to figure out where it is all going. "Random expenses" is not an answer. Start a written spending log. Every time you spend money on anything, write it down. After a month, review the list and you'll be amazed at what you learn.

[sandrark]

Yes, I am working part time because I am enrolled in the local community college, hopefully I will be transferring to a 4 year school soon. My monthly expenses are

$190 Car payment
$180 Car insurance

And my parents have been kind enough to take care of everything else since I made the decision to go back to school. The rest of the money I have left over seems to be used up by random expenses, gas and food primarily.

Martin, that CCD debt will just get more burdensome once you're at a university.

$50 a month to savings is secondary to getting the cards paid off. $400 for the car is OK (although *why* do you have a car payment if you're only making $1K per month??!!)

My advice: save up to $500. After that, every extra penny should go to pay off the cards.

Put the credit cards away and stop using them. Write out a budget, and limit the cash you carry - if you don't have cash or a debit/credit card on you, you can't spend more than budgeted. You should be able to pay $600 a month on the cards if you're disciplined. That will have them paid off in 5 months.

If you want it done faster, work more. Even when I was full time at Berkeley, I worked 30 hours a week (plus two choirs, with rehearsals and performances). It can be done, while maintaining a good GPA.

Get to work. The focus is the key. Good luck.

Sandi

[Walt_Pennsyl]

Get rid of your CC debt. Rule #1 for being an adult!

[swanson719]

Put $500 in savings, then knock out the CC debt. It does you no good to be paying off the CC's and then need money for something important and have to put it on credit. Hence the $500 set aside.

[Tree0164]

I agree with getting the saving to the $500 point and then putting every extra bit towards the credit cards.

You also need to do a budget-find out where your money is going each month.

[anonymous_saver]

I'd say your car is too expensive for the amount of money you earn. Would you consider taking public transit? That would save a ton of money! Or perhaps buy a used car outright? I mean this car (with gas and repairs) is eating up probably over half of your income!

I like the idea of saving up $500, then putting every extra cent towards paying off those CC. Stop using the cards. You don't need them. With having most living expenses paid for, give yourself a modest amount of spending money each month, and stick to it.

Good job on going back to school and looking at your money situation, you can do this!

[disneysteve]

I'd say your car is too expensive for the amount of money you earn.

Car payment is $190/month with an income of $1,000, so that's 19%. Is there some common rule of thumb for how much one should spend on a car? That doesn't sound like a lot to me. Assuming a 5-year loan, payments would add up to $11,400 which includes interest, so car might have been about $10,000. That seems reasonable, doesn't it?

[Walt_Pennsyl]

Yes, you should totally pay off your credit card. Finance 101.

[sandrark]

Car payment is $190/month with an income of $1,000, so that's 19%. Is there some common rule of thumb for how much one should spend on a car? That doesn't sound like a lot to me. Assuming a 5-year loan, payments would add up to $11,400 which includes interest, so car might have been about $10,000. That seems reasonable, doesn't it?

I've read various guidelines that transportation shouldn't be more than 10% of your gross pay. So for OP, that would be $100 per month, INCLUDING gas and insurance....

Sandi

[disneysteve]

I've read various guidelines that transportation shouldn't be more than 10% of your gross pay. So for OP, that would be $100 per month, INCLUDING gas and insurance....

Sandi

That would be impossible for many people because of gas and insurance costs. You can control the cost of your car but you don't have nearly as much control over the gas and insurance costs. If someone drives an average 12,000 miles/year and gets 20mpg at $2.50/gal, that's $125/month right there.

[sandrark]

Steve, it's a guideline. They typically don't work well for people who make very little money, or, conversely, those who make a lot of money.

In this case, it tells us that the OP is spending way too much on his car because of a car payment - on a $12K annual salary.

Sorry, but a car payment with that salary is ridiculous. He's driving too much car for his income.

Sandi

[boosami]

In this case, it tells us that the OP is spending way too much on his car because of a car payment - on a $12K annual salary.

I agree with Sandi... If OP can afford a ~$10k car on a $12k salary, it's ok for a person with a $120k salary to have a $100k car? With income that low, there should not be a car payment at all. I'd be driving a hand-me-down or a junker. When it broke down, I'd be bumming rides and taking the bus.

I've done minimum wage work before and at that time in my life there is no way I even considered having a car payment. Ditch the car, and save the $300/mo car expenses until you can buy a car right out.