New budget ideas

jannieApril 16, 2007

I read somewhere that while it's good to pay down your credit cards, you should also bank some savings. My budget seems focused on paying credit card bills and cutting personal spending as much as possible. Well, last September I signed up for online checking. It lets me see where my money is going. One of the services the on-line bank offers is automatic transfers. So I started saving an amount equal to my monthly credit card payments. I won't tell you how much I'm allotting, but I plan to have my credit card balance down to zero within 16 months. And I'll have a hefty amount in my savings account by then also.

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Hi jannie,

Do you know how to make about 35% on your money ... guaranteed?

Are your credit cards issued by banks or credit card issuers, or by stores?

Most of the regular card issuers charge about 15 - 18% annual rate of interest.

Most store-issued cards charge about 25 - 28% annual rate of interest.

If you pay minimum amounts monthly, you'll pay more interest (usually far more) than the stuff cost in the first place.

Is any of the stuff that you bought with the cards deductible re income tax? For most of us, almost all of the stuff that we buy ... isn't.

If you are in 25% marginal tax bracket, that means that you must earn $20 - 24. before tax in order to have the $15. - 18. residue after paying tax that you need to pay the interest at annual rate on $100. borrowed on regular cards.

Or about $33.00 - $38.00 on $100. balance owing (annual rate) on store-issued cards.

Have you found any bank that offers anywhere near that rate on money you loan them? And that's before you've paid the income tax on that income, after which you can send the money to pay off the loans on the cards.

Are you open to a couple of suggestions?

First ... don't cut up the cards, but promise yourself (solemn promise) that you'll pay cash for everything that you buy. Not use the cards for regular purchases.

Many people swear up and down that they don't spend more if putting it on the card ... but research shows that almost everyone does.

You will, however, keep the card available for use in case of emergency. And be tough with yourself when it comes to designating what you'll be willing to call an "emergency"!

Of $4.00 of the portion of income assigned to saving/paying off cards that you mention, use $3.00 to pay off the cards and save just $1.00. Or choose your own proportion but speed up the business of paying off the debt on the cards.

Pay off much more than the minimum allowed payment on each card.

If you want an early sense of accomplishment with regard to your increased skill at more effective money management, plus to feel good ... pay off larger amounts on the card with the smallest balance owing. You'll get a feeling of accomplishment when you get down to zero balance owing on the first card.

If you want to do the smartest thing, make the largest payments on the balance owing on the card on which you pay the highest rate of interest. Same sense of accomplishment when the first card balance reaches 0 ... and you'll know that you did the smartest thing.

That way, you get those expensive balances owing on the cards paid off quicker, the balances that you must pay off with after- tax money.

While the interest that you earn on your savings account is before-tax money ... and not very much, even at that.

Then, when you get the card balances paid in full, you can add more monthly to your savings program.

As of now, visit a major library and start a program of learning how money works. Use one of the staff to provide advice as indicated, and don't be afraid to admit your ignorance ... they deal with that every day.

When you get $4,000. - 5,000. - 6,000. saved, you'll have learned of what appears to be a quality stock. Sign up with a discount stock broker and use most of your savings to buy shares in that stock.

Ask the broker to have your shares issued in certificate form ... it'll probably cost $35. - 50. fee.

Talk to your favourite bank or credit union about their regulations, and interest rate, on a fully-secured line of credit. When you've decided where you can find the most attractive situation, take that certificate there to use as collateral to undergird your line of credit.

When it comes to borrowing ... they'll probably be unwilling to loan more than $5,000. - 6,000. when the value of the assets that you've left with them is $10,000.

When the day comes that you want to buy a car and need to borrow money to do it, you'll find that the rate of interest is much lower using that line of credit than if you can use only the car as collateral for the loan.

As you build up your savings, keep some on hand to pay emergencies that come up, and use your credit card on occasion to cover the cost. You'll feel really good when you have enough in the savings account to cover the credit card bill in full each month.

And you'll feel even better when you can pay that credit card bill in full out of current income, as part of your current business, leaving the savings alone.

Then, when the savings level builds up again, use a hefty chunk of it to buy another quality stock, in a different type of business - you need some diversity, in case one type of business runs into some trouble for a while.

Good wishes for developing a good system of managing your money.

You'll be thankful that you did, a few years down the road.

ole joyful

P.S. You may find some good ideas if you read some of my threads (and those of others, as well) here and on "Household Finance" and "Retirement", as well.

o j

    Bookmark   April 17, 2007 at 11:48PM
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I don't understand why some people say you should have money sitting in the bank, while paying interest on credit card debt.

Put all the money towards paying off that debt, and then once the debt is paid off, continue saving the same amount for the remaining months, and after your 16 month time period, you'll have more savings than what you'll have if you continue on the path you are currently on.

I think the argument for having cash in the bank is 'just in case'. That is, if an emergency comes up then you have some cash to pay for it. But I figure that if that happens, just use your credit cards. Or if you absolutely need cash, get a cash advance on your credit cards.

    Bookmark   April 18, 2007 at 8:41AM
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Chemocurl zn5b/6a Indiana

Or if you absolutely need cash, get a cash advance on your credit cards.
I believe that is what often happens to many folks who get in trouble with credit card debt. They have no savings, so when emergencies arise, they can only resort to 'charging' (and paying transaction fees and interest on) it.

Things such as the frig goes out
transmission goes out,
accidents, and unable to work and earn 'full 'wages, sickness...just so many things that one should be prepared to handle.

This week I had an emergency visit to the dentist, and will be having some expensive work done this year. Will I have to charge and pay interest on it? No, I'm prepared for such emergencies....just like when the frig went belly up.

Just my 2 cents.


    Bookmark   April 18, 2007 at 12:00PM
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Jannie, I completely agree with everything Ole Joyful said. I would like to add another reason to keep your credit card accounts open besides for emergencies. Your available credit line versus your balance to pay directly affects your credit score. The bigger your available credit versus how much you owe, the better. If it were me, I would cut up all but one card- the one with the best interest rate, but keep all the accounts open.

    Bookmark   April 18, 2007 at 2:23PM
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This week I had an emergency visit to the dentist, and will be having some expensive work done this year. Will I have to charge and pay interest on it? No, I'm prepared for such emergencies

So do you currently have credit card debt that you are paying interest on? If so, then you are paying interest all the time, instead of just the period between when the emergency happens and when you are finally able to pay it off.

I totally agree that it is good to have an emergency fund, but not if you have credit card debt. Credit card debt is a huge drain and should be avoided at all costs.

    Bookmark   April 19, 2007 at 8:35AM
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Hi again, jannie,

I agree with Greg H, that if it were me, I'd use pretty well all of the available dollars to pay off the debt on those credit cards as quickly as possible, secure in the knowledge that I could use the card to cover emergencies, over the short term. That's emergencies, not regular purchases ... that's to be cash only, or do without until I can afford it.

But I didn't want to frighten you with that suggestion, so suggested that you do both.

When you have some savings built up and develop that line of credit, if you get into a bind with putting a large amount for an emergency on the credit card(s), you can draw some money on the line of credit to pay off the credit card balance, at a much lower rate.

But ... make sure that you don't use that path to cover regular purchases.

Live within your means ... make your pay cheque work totally for you, not partly for someone else because you had to have something before you could afford it. That means reduced income, from now on until the debt is paid ... I earnestly hope not into next year.

Ensure that your money works for you ... not to a substantial extent for someone else (which means less available for you).

The advertisers want you to buy their stuff ... now. That is ... they want the money in their pocket, not yours.

Good wishes for shrewd use of not only your income ... but management of your assets, as well.

It's really nice to know that, should your paycheque be interrupted for 3 - 6 months, even a year, you'd still be floating ... reasonably comfortably.

Not sweating blood.

I don't like sweating blood, myself ... and I didn't like to see my financial advisory clients suffering that kind of trauma, either.

Living from paycheque to paycheque ...

... would drive me nuts!

Good wishes to you and yours.

ole joyful

P.S. If you have kids ... tell them my story about money management for kids - I think it's over on "Money Saving Tips". Maybe "Household Finance".

There's a thread over there telling how to borrow to invest for almost no net cost, as well ... but that's sure as heck not using credit cards to do it!

o j

    Bookmark   April 19, 2007 at 3:42PM
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I doesn't make a lick of sense NOT to pay off your credit cards. THINK ABOUT IT. You're paying high interest on a loan while you have money just sitting there not being used?

Jannie, do your math! If you can pay your CC balance off in 16 months while putting an equal amount in saving, you could pay those cards off in less than 8 months by putting all the money into them.

I don't know what your interest rates is but I am thinking you could get those cards paid off in five months with the interest you save by paying them off early. Then, after that all your discretionary income can be put into savings. Why string your misery out for 16 months? Get it over with quickly and learn from it.

Every cent you pay in interest on those credit cards, while you stretch the payments over 16 months, is just money down the loo.

    Bookmark   April 20, 2007 at 1:36PM
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This may have been discussed before. Another way to speed up the paying off of credit card debt is to transfer it to a new card that offers 0% for 6 months to a year. Most offers now charge a 3% transfer fee which can wipe out or seriously reduce any savings. But if you look at all the offers that flood your mailbox, you can probably find one that will do the transfer with no fee.

Whichever way you do it Jannie, congratulations on getting your spending under a plan and paying off those cards. :)

    Bookmark   April 20, 2007 at 6:59PM
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Be careful of those 0% interest debt transfers. They way most of them work, is say, you transfer $1000 to the new 0% debt transfer card account, and are making $100/mo payments to pay it off. Now say you charge something new for $50. If you use that card and charge a new purchase, all the payments you make every month, go to reduce your transfer first. Meanwhile your new purchase of $50 is going to have interest tacked on it for months until you pay off every penny of your transfer first.

You can't send in your usual $100 payment and an "extra" $50 to cover your new purchase that month. I know people who thought otherwise, and were in for a huge surprise because they did not read their fine print.

If you transfer your existing debt to a 0% special, introductory card, DO NOT USE IT FOR ANYTHING ELSE.

    Bookmark   April 20, 2007 at 10:00PM
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Hi again jannie,

Have you talked to your friendly banker?

Or, even better, a credit union, for sometimes they take into account not only assets, but integrity, as well.

Perhaps they'd lend enough to pay off much of the C C debt, especially on the store-issued cards, which usually charge 25 - 29%.

If they'd lend for even 12% or so, that'd be a lot better.

Perhaps not that much better than mainline credit cards, which charge 15 - 18%, usually.

But they might take pity on you and charge at a lower rate. Do you have some portable assets, e.g. whole-life insurance policy with built-up cash value (you're paying a premium price for such insurance ... so you should find a way to use it to more or less make it pay its way) that you could use as collateral for the loan? That would reduce the rate of interest substantially.

Do you have a relative or friend who could and might be willing to lend you some of the cash? Usually it's a bad idea to borrow from such, as it often junxes the friendship. (That was supposed to be "jinxes" ... but I thought that what we'll blame the keyboard for producing was too relevant to delete).

But it seems to me that, if you find what rate that the bank might have charged, if they had been willing to lend, it would seem to me fair to offer the relative part way between the rate that the bank might have charged and the one that you're paying the credit card issuer.

You'd need some penalty that'd be serious enough to teach you to keep your feet out of the bear trap called "credit card debt", henceforth.

I just realized that none of us had offered that suggestion earlier. Which could well be a useful one, if available.

Good wishes as you work your way through this issue - and make plans for the future.

ole joyful

    Bookmark   April 21, 2007 at 7:08AM
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Folks, this is getting embarassing for me. I have struggled with debt problems for years. I did not ask for faster ways of paying off credit card debt. I am not stupid,I am just weak in the sales resistance area. I posted because I had found a psychological "trick" for myself. I found a way to payy off my debt and build up some savings for future purchases. Please don't post any more replies. Since 2001,I have whittled my debt down from $30,000 to $14,000. I will be totally out of "debtor's conscience prison" by mid 2008.

    Bookmark   April 21, 2007 at 12:35PM
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Hi again jannie,

Please forgive me for disobeying your request that we resist the temptation to make further posts here.

I ask your forgiveness if you felt that I was being critical in my several posts.

I did not feel that way, at all.

And as I read the posts that others have made, I don't get a feeling that they were being holier-than-thou, either.

Just providing some suggestions of different ways to deal with the issue ... should you choose to use them.

We sincerely hope that you can make use of whatever ideas that you may choose to use, and ignore whichever others you wish to - no problem, at all, I'm sure.

And we send positive thoughts to you, hoping that you can work the issue through in a way that seems best to you.

And we send some affection, as well.

It is your life, after all. We hope that it goes well for you.

ole joyful

    Bookmark   April 22, 2007 at 4:41AM
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OK, I didn't read all of the responses, so hopefully I'm not repeating. Unless you are undertaking a major life change and will never again have credit card debt, I would slam money in savings before paying off the card. Why? Because if you end up needing money and use the cards you are right back where you started. If you have a savings cushion, you won't rack up more debt.

We ALWAYS put money in savings, even when carrying cc debt. It's been many years since we had cc debt, but that money we put away all of those years has grown and grown and grown. Savings is the first "bill" we ever pay.

Worked for us.


    Bookmark   April 22, 2007 at 11:37PM
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I read somewhere that while it's good to pay down your credit cards, you should also bank some savings.

I guess when I read this, I interpreted it as a question about whether it was a good idea to bank some savings.
Mathematically, it isn't, but if for you it is psychologically a good idea then go for it.

The 'best' plan isn't very good if you can't force yourself to follow it.
You have to find a way that works for you, and one that you will continue to follow in the future.

    Bookmark   April 23, 2007 at 10:03AM
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asm198 - Zone 6a (MO)

I know this thread is very old, but I wanted to add that we are planning on doing what Jannie is/was doing. My husband and I have gotten into a bit of a debt mess over the past two years. The credit cards used to be for emergencies only, then there were some house expenses that came up, we got married, and I lost my job. So, suddenly some irresponsible decisions, coupled with some emergencies, left us with quite a bit of credit card debt.

While I look for a permanent job, I'm temping, but it's not helping all that much. Anyway, my point is that we wouldn't have been in the position we are currently in if we had some savings prior to the 'mess'.

Yes, we could have our debts paid down faster if we put every single penny toward them, but we would be in the same situation we are now if some emergency came up (house problem, car issue, etc). For us, we would rather pay the credit cards off more slowly and build up some savings, so that we wouldn't have to rely on the credit cards in the future as our only emergency backup.

Of course, we are only going to start doing that once I get a permanent job. While I am temping, every penny is going toward the debt.

    Bookmark   December 30, 2007 at 6:29PM
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Lacking a home-based business, for most of us, the stuff that we buy using a credit card isn't deductible.

So the interest on money used to buy it isn't deductible, either: we must pay off that debt with after-tax money.

If I have a regular card, usually interest rate is 15 - 18%.

If I'm in 20% income tax rate, I must earn $20.00 before-tax, then pay $4.00 tax, in order to have the $16.00 to pay the interest on a $100. loan on a regular card.

On a store-issued card, usually charging 25 - 28% annual rate, I must earn $35.00 before-tax, then pay $7.00 tax, leaving me with $28.00 in hand to pay the interest only on the debt owing to the store that issued the card.

If I put that $100. into the bank, earning 5%(?), the income tax people want $1.00 of that ...

... leaving me with just $4.00 after-tax residue to put into my pocket.

I like that basket of apples a lot less than paying down the credit card debt.

The person who may be able to dig up the will-power to leave the credit card alone while paying down the debt, buying goods with cash only, paying the credit card off quickly, and using the card only for **real** emergencies, can put some money into his/her pocket instead of giving it to the card company.

If the person is laid off, having those cards much closer to paid off will mean that there's less still owing on which to pay high interest monthly ... and when adding to the balances, they'll still be lower, and requiring much less interest to pay monthly, so the payments will pay off more of the principal still owing ... every month.

The person who lacks the discipline to control his/her use of that credit card will find that there's a high price, i.e. penalty, to pay for that instance of mismanagement.

Money that isn't available for more important uses.

Good wishes for ongoing (which can be more or less painless) learning about the intricacies of wise money management ... and the will power to implement that increased wisdom. Without driving yourself crazy.

It's a poor day that you don't learn something, i.e. become wiser than you were the day before. And become more powerful than you were the day before ... and don't forget, that knowledge is power ... but only if you use it.

Knowledge sitting there in your brain unused ... might as well be at the bottom of the Mississippi.

ole joyful

    Bookmark   December 31, 2007 at 2:11AM
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This is Jannie the OP. I've been pretty successful at getting my credit card debt down. I owed over $16,000 on one ccard, nothing on the others. I've paid down that debt to under $9000. And I've also been able to build up my savings to about $6000. I'd like it to be more but I had a lot of high bills this year, two kids in college, medical expenses, and a two bad car accidents, two totalled cars. Thanks for asking.

    Bookmark   December 31, 2007 at 6:39PM
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Looking over my most recent post, why don't I apply that $6000 to the $9000 I still owe and get it down to $3000 ? I might just do that!

    Bookmark   January 1, 2008 at 12:40PM
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jannie, IMO that would be the best thing you could do! I'm pleased to see you say that. It sounded like you were hesitant before. We all like a bit of a cushion, but I think you've obviously developed the discipline to pay down your debt and manage your finances well, now and in the future. I really think it's advantageous to pay down the debt asap because you'll eliminate much more accumulation of debt by the interest on that $6000 that will compound. Sounds like you'll have it paid off in no time.

Keep paying it off! :) Congratulations on a successful paydown. Keep us posted on how it's going. I'm sure you realize that once paid off, you can maintain the same discipline and put that money that was going toward debt payment into a savings account and build it up and watch the interest compound in the opposite direction!

Good for you! Keep up the good work. BTW, I know that it's not easy, but once the mind is set, it becomes much easier. It did for me anyway, and I hope it's so for you!

What a great way to start the new year, eh? :)

    Bookmark   January 2, 2008 at 11:15PM
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Well done, Jannie.

Well done!


Good wishes for increasing knowledge about the use of money, and discipline to make it work more effectively for you.


ole joyful

    Bookmark   January 16, 2008 at 1:07AM
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I have to agree w/ whoever said to have a little in savings too. My DH works construction & makes pretty decent money, but we are still paying on some small (previous) cc debt. My point on keeping a little in savings is b/c if DH were to get laid off unexpectedly, yes, he could draw unemployment & maybe find another temp. job, but he still would not be making what he makes now & if something awful came up we would be forced to put it on credit if we didn't have a little bit stashed away... I don't like that thought. I just always like to have that to fall back on just incase something happens. I do know several ppl that think of money as "you can't take it w/ you when you die, might as well spend it", but I just can't do that... I would not feel comfortable w/ nothing saved back. Just my 2 cents.

    Bookmark   January 27, 2008 at 10:21PM
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Congrats on the progress you've made!!!!

Big fan of Dave Ramsey, he suggests keeping $1000 in Savings (your emergency fund), paying down the debts and then building your emergency fund.

Here is a link that might be useful: Dave Ramsey

    Bookmark   April 2, 2008 at 3:02PM
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I keep several thousand in savings and have had to use it all plus get a loan a couple times in the past two years. Fortunately we're out of that hole now and saving.

Paying off the credit card every month is the number 1 priority. I never pay interest on credit cards. Getting a real loan to pay off the card is much better. However, if you continue to buy the things that got you into debt, you are no further ahead. If you want or need something, you should save up and buy it when you have the money.

My plan is to always pay cash for my cars. I save $500 per month for the car. Out of that comes emergency expenses and replacement. When I get $5,000 in that savings account, I have enough to buy a "new" 10-year-old car for cash. That happens to be every year even after buying new tires. If I like the car I'm driving, I'll go several years and have plenty to buy a really nice newer car if I want to. The point is I always have enough money to buy a new (to me) car, and I am the one earning the interest on those payments, not the car company or the bank.

One thing that never seems to occur to people is this: if you don't make enough money to live where you live, then move. A friend of mine moved out of San Antonio to a nearby town in a different county. He saved enough on rent, insurance, and taxes to buy his 16-year-old son (high insurance risk) a new car.

    Bookmark   August 6, 2008 at 3:09AM
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