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As previously mentioned, I have $153k in unsecured debt. $90k is student loans that are in forbearance until February. I recently joined CCCS to take care of the credit card debt and the rest of the money is owed to the Bank of Grandfather. Between the discounted payments from CCCS and the loans being in forbearance, I have extra money of at least $500 per month right now. I have about $1650 in an ING account. Every book on earth says to have three months of income in savings for your emergency fund. I have nowhere close to that. So, the question is: Since I have this extra $500 for a few more months, do I put it toward my CCCS plan or do I put it into savings? |
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The answer to the question lies within yourself: Do you feel confident that your savings would carry you through --insert list of emergencies--? If the answer is no, then you should save more. If the answer is yes, then you're fine. If it were my savings account, though, I wouldn't be comfortable with $1,650. There's also the forbearance issue but I don't know what dynamics that adds to the mix. |
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I would first start calling the credit card companies and discuss lump sum payoffs with them -- and have the accounts listed as "paid off, closed" rather than "discharged" or some other negative. You will be surprised at how many CC companies are willing to take $0.55 on the dollar or less -- but you will have to save up enough to do that. Concentrate on the ones that have the greater interest rates, and move those out first. I would agree with MBH's response, and get something in savings of significance for potential emergencies or -- egads -- job loss. Maybe take 3/4 of your $500 and save, using the other 1/4 to put aside for payoffs? Once you're comfortable with your savings amount, pile the whole $500 into destroying your debt! Also, as you pay off CCs: be sure to ADD your previous minimum payments from each paid off card to your $500 as "disposable income". This will exponentiate your payoffs to other debtors -- keep doing this until even your mortgage is paid off and have a good life... Thanks for your response. Most creditors will only list a settlement as a negative on the credit report. In addition, the discharged amount will result in a 1099 and additional income, which I try to avoid because I have my deductions set so that I get a very low refund. Definitely like the tips on savings. Have to get more in there! That's my current #1 financial goal.
(Oct 13 '09 at 14:56)
Frugallawyer
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First off, must make a few assumptions-Since you have gone with the credit counseling service, then you must be satisfied with your credit card debt situation. So I will not address that other than the decision of whether to discontinue that and go alone. I agree with Charlie above that dealing with the CC companies yourself will probably save you money. The counseling service is just another layer between you and your spending problem-which hopefully is over now that you have gotten this far. My second suggestion would be, make sure you are planning your spending, and maximizing your income. The two ways to get out of debt are to make more money, and spend less so that you can make progress on your loans. The hard part is sticking with the plan. But every time you are tempted to overspend, remember how much you hate those collection calls. My third and last suggestion is participating in a group such as this or something similar closer to home, that will allow interaction, opportunities for learning, and most importantly support in your efforts to get to freedom in your personal finances. This is a process. Now to your question of more or less in emergency savings. My rule of thumb is that if you can get out of debt with all the above going at full bore in less than 18 months, then a small emergency fund such as yours is ok. If you anticipate you will take longer than that then a larger fund would be in order. How much would depend on a lot of factors such as job loss risk, your family situation,(3 kids in diapers would be different than a single guy), and your risk tolerance. Congratulations on making the decision to deal with it and good luck. |
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As Dr. Dean said, factors such as job loss risk and family situation are important factors to consider when deciding between savings and debt payoff. When the family debts that I took over far outweighed my earning ability, my reaction was to put everything toward the debt. After a while, I realized that I wasn't comfortable with this situation because every time a problem came up, it became another issue to worry about. With enough savings, at least I could take care of the problem and remove it from the list of things to take care of. With that experience, I would recommend at least saving $125 (25%) per month of your extra money for emergencies, and put the rest toward the debt. If your job situation is secure, or as secure as it can be in this market, then you'll get by for now without 3 months' worth of income. Good luck! |
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I vote more money to the savings. It will keep you from getting derailed once your forbearance ends and you have to readjust. Ahem. I speak from experience. I did not do that and got totally off track last winter. I am on the cusp of getting to my $1000 emergency fund, and now I am already thinking that my next savings goal is 1 paycheck, the 1 months' salary, then 3 months' expenses . . . even though that isn't part of the Total Money Makeover plan that I'm on, the comfort that I get from knowing I am not a new set of tires away from financial ruin is worth it. |
There were a couple of terms I wasn't familiar with, but since they were good to ask as questions themselves, I did so: http://www.cashcommons.com/questions/12/what-are-the-consequences-of-having-a-loan-go-into-forbearance and http://www.cashcommons.com/questions/13/what-role-does-the-cccs-play If you have insight it would be great to share!