what to pay off?
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| Mon, 10-20-2008 - 9:25am |
Good morning: I have an unusual "problem" in that I actually have a bit of money to pay off debt with. I am soon to inherit about $23K. I have a lot of debt ever since I got laid off a year and half ago. I have been trying to make it freelancing which also lets me stay home with my kids but we have been losing money like crazy as my income is very low and unpredictable (and with the credit crunch and Wall Street problems some of my clients haven't been able to pay me). I shudder to write this but I have over $60K in debt (credit card) plus $11K in a car payment. Our other car is paid off.
My instinct is to pay off all the little stuff with the highest interest first. I have some department store and smaller credit card balances in that category. All said it should be about $6 or $7K. That leaves the four really big ones with balances between $10K and $13K each (ouch). They have lower interest and I never, ever use them. They are just parked to pay off. My car, a 2003 Passat station wagon, runs fine but has about 85,000 miles on it and is expensive to fix when something goes wrong. I am slightly upside down in it. I would like to keep about 10K to 12K in the bank for those months when I don't get paid plus I want to have a cushion for once.
Does this seem like a good plan or should I pay off my car? My husband's car has 140,000 miles on it and is getting a bit shaky. I'm hoping we don't have to buy another car because then we would have two car payments. I also would love to have some money set aside to adopt someday (I saw someone else on this board has the same dream). Any thoughts?
Thanks, jenny

Well my first instinct is to say Yay for the 23K, but that doesn't seem appropriate since its an inheritance, so I will just leave it.
This is what I would do (its just me though so take it at face value). I agree to get rid of those pesky high interest, low balance cards. If nothing else, getting rid of them will mean less payments to make every month and will simplify your life! Lets assume that it comes to 7K.
Bex -
First question is: Is all your payments on time.? If you are making all your payments on time but just tight. Then this is what I would do. Also if your high bills are costing you around 3.9 in interest.
I would add up all my payments. Pay off up to 3,000.00 on all the little ones with high interest. Take the amount of payments at least half of amount. Add it to the next card up. Kind of snowball the thing.
I am getting 4.01 at the credit union here in town for what they call a HI Checking account. It looks like that may be going up to at least a 4.25 soon. We also have a dividend credit card that we charge our living on and pay off each month. That gets us another 9.00 to 11.00 a month.
I would check around at some of your small local banks. See what they have to offer like this.
On 20,000 you could make around 80.00 a month.
Thanks for replies so far -- keep 'em coming! Yes, we pay everything on time. I do still draw some unemployment so that helps when pay is slow but it is tight. And thank you for your condolences. It was my father who died after a long, difficult illness. It was very sad but also for the best.
I like the idea of finding a better place to park the remaining balance to grow it a bit. I enrolled in ING a few years ago when it was over 4 percent interest paid. it is now down to 2.75. I absolutely need to have money in reserve to draw from on those months when payment is delayed. I should be getting two contracts this week for probably 3 to 4K each which would be nice but I won't see that money for several months. I have applied for a fulltime job but chances are slim as there are so many people out of work in my field and competition is fierce for everything. I like working at home it's just the money thing. Our mortgage is very high for our income but we bought based on what we used to make together. We've talked about selling and buying something cheaper but sales are slow and we are reluctant to lose our best asset. We've also talked about refinancing but with my income now unverifiable we would no longer qualify.
All in all this money could not have come at a better time. I just don't want to screw it up!
Jenny
I am big on money making money then using it on debt.
I think 2.75 is very very low I would check around at other banks and credit unions in your town for higher interest
Hey Jenny,
I was wondering if you know what you would have to do to get your fixed expenses underneath the amount DH brings home every month? Then use your income for the more flexible expenses (like gas, groceries, etc). If you could use these funds to pull your monthly expenses below that threshold (I suspect paying off the car would be part of that formula) then I would seriously consider that.
It seems to me like you are talking about a huge cushion there considering your debt at this time. Ideally we'd all have 6-12 mos but that is probably not fiscally responsible with that large of consumer debt hanging over you. I don't know what your average monthly income is but I would put a couple months of the average back for cash flow balance and the goal would be to keep that up at that level. Months you got extra above that, put the money in that account. Months that you've got slow pays, pull it out to make it even.
Nothing says you have to pay the car clear off. Cutting that debt in 1/2 would bring you right side up and lower your interest for the remainder of the life of the loan. Might not be a bad idea.
HTH!
Peg
I would pay off all the little cards, then the car.