Trying be like squirrels.
March 28, 2011 6:36 AM Subscribe
My fiance and I are looking into our financial future and are looking to save money. The thought came to me last night that if we lived solely on his income and saved all of mine, we could be out of credit card debit in no time (just a little over a year)! At that point we could start saving for a down payment on a house. We can easily live on his income. We would only have to tighten our belts a little.
Have you done this successfully? We are looking for both pros and cons of this strategy.
Personal background info: we are both 33, getting married in June, no children yet- but plan to start trying in the next couple of years, currently live in Richmond, Va but are planning a move to Roanoke once he finds an equivalent job there, I will continue to work full time until we actually have children- at which point I will become a stay at home momma.
Personal background info: we are both 33, getting married in June, no children yet- but plan to start trying in the next couple of years, currently live in Richmond, Va but are planning a move to Roanoke once he finds an equivalent job there, I will continue to work full time until we actually have children- at which point I will become a stay at home momma.
It is not uncommon for people to go to 1 income as "practice" for seeing if they can afford to have one person be a stay-at-home parent.
posted by k8t at 6:39 AM on March 28, 2011 [4 favorites]
posted by k8t at 6:39 AM on March 28, 2011 [4 favorites]
I can't see any con to doing this (other than the belt-tightening, which you say you're up for), and I know plenty of couples who do do it (or something like it) for various reasons. There's no rule that says you have to spend all the money you earn!
posted by mskyle at 6:48 AM on March 28, 2011
posted by mskyle at 6:48 AM on March 28, 2011
I can't see that there is any "con." It's a terrific way to quickly get out of debt and rack up savings, and puts you in a terrific position to take time off to be with your eventual kids. I'll be interested to see if people can come up with a downside, because it's hard to see a downside to "we can live substantially below our means and save the difference."
posted by not that girl at 6:50 AM on March 28, 2011 [1 favorite]
posted by not that girl at 6:50 AM on March 28, 2011 [1 favorite]
The cons really boil down to:
- Can you stomach the belt tightening ?
- Are you both personally secure and mature enough to say "we don't need this" with out bickering or being resentful/holding grudge/keeping score about it ?
posted by k5.user at 6:55 AM on March 28, 2011 [1 favorite]
- Can you stomach the belt tightening ?
- Are you both personally secure and mature enough to say "we don't need this" with out bickering or being resentful/holding grudge/keeping score about it ?
posted by k5.user at 6:55 AM on March 28, 2011 [1 favorite]
Take a look at Dave Ramsey's Total Money Makeover - it should help you formulate a solid plan that builds for the future.
Personally, I can't see any cons in paying off debt and living on one income, or even just living off less than you earn.
posted by MighstAllCruckingFighty at 6:58 AM on March 28, 2011
Personally, I can't see any cons in paying off debt and living on one income, or even just living off less than you earn.
posted by MighstAllCruckingFighty at 6:58 AM on March 28, 2011
I haven't done this myself (never been married or shared finances with a partner), but my parents did this and had nothing but good things to say about it. As long as you are not going to feel totally deprived on one income (not meeting basic expenses, not able to buy trivial items EVER, etc), then I say go for it! Having robust savings gives you security and options for the future.
FYI, my parents ended up going down to one income "for real" when the second child was born, because childcare for two would have eaten up pretty much all of my mom's pay anyway. She said that the "practice" they'd already gotten made this easier.
posted by Bebo at 6:59 AM on March 28, 2011
FYI, my parents ended up going down to one income "for real" when the second child was born, because childcare for two would have eaten up pretty much all of my mom's pay anyway. She said that the "practice" they'd already gotten made this easier.
posted by Bebo at 6:59 AM on March 28, 2011
Make a budget for monthly expenses on just one income, taking into account savings as well as emergency funds (ER trips, car breakdowns, etc). Give yourselves each an allowance for fun things. Talk specifically about what you will spend money on and what you will not - examine past credit card/debit card purchases and see if you have any discrepancies about what you consider 'expendables'.
You may consider your morning Starbucks essential but your fiance may consider it a luxury. This is a great time to communicate not only about how you two will spend your money but also brainstorm about how specifically you will cut back.
Agreed that it's also a great practice for being a stay at home mom.
posted by amicamentis at 7:02 AM on March 28, 2011 [2 favorites]
You may consider your morning Starbucks essential but your fiance may consider it a luxury. This is a great time to communicate not only about how you two will spend your money but also brainstorm about how specifically you will cut back.
Agreed that it's also a great practice for being a stay at home mom.
posted by amicamentis at 7:02 AM on March 28, 2011 [2 favorites]
One other con before you are legally married: exactly whose money is whose? In the (hopefully very unlikely) event that you split up before you get married, who owns that big lump sum that you've been building?
You've phrased is as "living off his and saving mine" so in that sense it seems like the lump sum would be yours, but really it belongs to both of you. If you're already using joint accounts then this is not an issue, but if your accounts are separate at this point, you might think about where to put that money that is fair for both of you.
(IANAL or Accountant; it's just a thought)
posted by CathyG at 7:05 AM on March 28, 2011 [7 favorites]
You've phrased is as "living off his and saving mine" so in that sense it seems like the lump sum would be yours, but really it belongs to both of you. If you're already using joint accounts then this is not an issue, but if your accounts are separate at this point, you might think about where to put that money that is fair for both of you.
(IANAL or Accountant; it's just a thought)
posted by CathyG at 7:05 AM on March 28, 2011 [7 favorites]
The only possible downside I can see is that you could end up with more arguments over what to spend money on. Will you feel differently about it when the other person is buying their personal treats out of joint money instead of "their own" money? How will you handle the buying of birthday presents?
posted by emilyw at 7:06 AM on March 28, 2011 [1 favorite]
posted by emilyw at 7:06 AM on March 28, 2011 [1 favorite]
I came in to say what CathyG said. If you're living off his income and saving yours, what happens to the money if you break up (I know you're getting married in a couple months, but it's not a bad thing to imagine worse case scenarios and plan for them)? Talk about it and write it down. It's not a pleasant thought, but at this point (you've decided to get married, and you've talked about how to live on less), you should have some practice with unpleasant conversations. A simple plan like split the savings 60-40 or 10% of the savings are moving expenses for the party who moves out and the remainder are split evenly should be sufficient.
Otherwise, it sounds like a good plan. I'd agree beforehand under what circumstances you're allowed to spend the saved income. Something unexpected like a band you never thought would come to town or an opportunity for a great trip or your car gets totaled.
posted by crush-onastick at 7:14 AM on March 28, 2011
Otherwise, it sounds like a good plan. I'd agree beforehand under what circumstances you're allowed to spend the saved income. Something unexpected like a band you never thought would come to town or an opportunity for a great trip or your car gets totaled.
posted by crush-onastick at 7:14 AM on March 28, 2011
Response by poster: As far as belt tightening- on paper it looks like we would have around $1000 (give or take a little) per month for household expenses (groceries, TP, and the like) & frivolities. I think that is more than enough. We still need to sit down and figure out exactly how much he will be bringing home once I am added to his heath insurance policy. He tends to buy more 'stuff' than I do. I spend all of my extra (non-bill related) money on all of the grocery & household items we need.
Right now we have separate accounts, but the thought would be to 2 shared accounts. Both with both of our names on them, but one where he deposits his paycheck, all bills are paid from & all purchases are made from. The other would be where I deposit my paycheck and doesn't get used until we can knock off one credit card bill in full at a time- then start building it again.
He has more credit card bills than I do with less debt on each one. I have one large credit card bill and a student loan. With just the credit card debit gone per month we could be saving an additional $650 a month.
Right now neither one of us makes any extravagant purchases. He bought us a television for Christmas, but only after we discussed it at length and found the best deal. We are both pretty cheap to begin with.
posted by MayNicholas at 7:15 AM on March 28, 2011
Right now we have separate accounts, but the thought would be to 2 shared accounts. Both with both of our names on them, but one where he deposits his paycheck, all bills are paid from & all purchases are made from. The other would be where I deposit my paycheck and doesn't get used until we can knock off one credit card bill in full at a time- then start building it again.
He has more credit card bills than I do with less debt on each one. I have one large credit card bill and a student loan. With just the credit card debit gone per month we could be saving an additional $650 a month.
Right now neither one of us makes any extravagant purchases. He bought us a television for Christmas, but only after we discussed it at length and found the best deal. We are both pretty cheap to begin with.
posted by MayNicholas at 7:15 AM on March 28, 2011
if we lived solely on his income and saved all of mine
There's no need to say, well, he's supporting us with his income X, and I'm paying down debt with my income Y.
Instead, consider that you've got X + Y dollars, and can comfortably save Z amount per month (which may be less than or greater than Y; decide this based on a budget, not based on whatever your individual salary happens to be.)
Then if you're the type of family that pools their income, you're done. If you're the type who like to keep finances separate, then you can consider that you're each contributing Z/2 to savings, and the rest of your respective incomes to everything else.
The numbers may be exactly the same as your original plan, but it avoids the potential for any weird territoriality about whose money is doing what.
On preview which feels weird to say now that you don't have to hit preview to see new comments coming in, but whatever if you're going to do shared accounts anyway, just do one shared account and save yourselves the trouble of doubling your bookkeeping.
posted by ook at 7:21 AM on March 28, 2011 [2 favorites]
There's no need to say, well, he's supporting us with his income X, and I'm paying down debt with my income Y.
Instead, consider that you've got X + Y dollars, and can comfortably save Z amount per month (which may be less than or greater than Y; decide this based on a budget, not based on whatever your individual salary happens to be.)
Then if you're the type of family that pools their income, you're done. If you're the type who like to keep finances separate, then you can consider that you're each contributing Z/2 to savings, and the rest of your respective incomes to everything else.
The numbers may be exactly the same as your original plan, but it avoids the potential for any weird territoriality about whose money is doing what.
On preview which feels weird to say now that you don't have to hit preview to see new comments coming in, but whatever if you're going to do shared accounts anyway, just do one shared account and save yourselves the trouble of doubling your bookkeeping.
posted by ook at 7:21 AM on March 28, 2011 [2 favorites]
Response by poster: In the unlikely event that we split before the wedding: It would only be about 2 month's savings, so I would say we split the savings right down the middle. In all honesty, by the time we get down to the bank together to get this all set up (conflicting work schedules) we will probably only be a month away from the wedding anyway.
posted by MayNicholas at 7:22 AM on March 28, 2011
posted by MayNicholas at 7:22 AM on March 28, 2011
The thought came to me last night that if we lived solely on his income and saved all of mine, we could be out of credit card debit in no time (just a little over a year)! At that point we could start saving for a down payment on a house.
You're on the right track here, for pretty much everyone getting rid of any credit card debt should be the #1 priority above all else. Saving up for a house down payment is also a good medium-term goal. Other things to focus on would be student loan debt, and saving for retirement in 401k, IRA, etc.
We can easily live on his income. We would only have to tighten our belts a little.
The live on his income save your income thing is an easy way to think about it, and would be good practice for doing the stay-at-home parent thing as k8t mentions above. But really you can just think of this as "Our joint expenses could be less than what they are currently" and approach it from that perspective even if you don't go with using all of your income for savings/debt and all his for expenses. Step one is to use some method to figure out how much you are spending on each type of expense, which can often be surprising. You can try writing up a budget with how much you would ideally spend on different things but usually it's difficult to estimate what is realistic without knowing exactly how much you spend currently. An online tool like Yodlee Moneycenter or some other method of tracking your expenses can help a lot with this, especially if you use a debit card rather than cash for most purchases. Once you have a good idea of what you are actually spending, you can take a closer look at what would be the easiest to cut down on and put toward your debt.
posted by burnmp3s at 7:23 AM on March 28, 2011
You're on the right track here, for pretty much everyone getting rid of any credit card debt should be the #1 priority above all else. Saving up for a house down payment is also a good medium-term goal. Other things to focus on would be student loan debt, and saving for retirement in 401k, IRA, etc.
We can easily live on his income. We would only have to tighten our belts a little.
The live on his income save your income thing is an easy way to think about it, and would be good practice for doing the stay-at-home parent thing as k8t mentions above. But really you can just think of this as "Our joint expenses could be less than what they are currently" and approach it from that perspective even if you don't go with using all of your income for savings/debt and all his for expenses. Step one is to use some method to figure out how much you are spending on each type of expense, which can often be surprising. You can try writing up a budget with how much you would ideally spend on different things but usually it's difficult to estimate what is realistic without knowing exactly how much you spend currently. An online tool like Yodlee Moneycenter or some other method of tracking your expenses can help a lot with this, especially if you use a debit card rather than cash for most purchases. Once you have a good idea of what you are actually spending, you can take a closer look at what would be the easiest to cut down on and put toward your debt.
posted by burnmp3s at 7:23 AM on March 28, 2011
Make sure you each set aside play money for each of you to play with how you choose.
Ours is $250 a month per person. That way he doesn't have to care if I buy a new outfit and I don't have to care if he buys a new golf club.
Otherwise it just wouldn't be any fun having to discuss if I *really* needed that new lip balm.
Good luck!
posted by jillithd at 7:27 AM on March 28, 2011 [3 favorites]
Ours is $250 a month per person. That way he doesn't have to care if I buy a new outfit and I don't have to care if he buys a new golf club.
Otherwise it just wouldn't be any fun having to discuss if I *really* needed that new lip balm.
Good luck!
posted by jillithd at 7:27 AM on March 28, 2011 [3 favorites]
My husband and I did this when we got married; we always "just" used his salary and mine was put away for vacations, saving for a new-used car, paying down student loans ahead of schedule, building an emergency fund for the house that turned out to be needed way earlier than expected, etc. We even qualified for our mortgage on just his salary.
There isn't really a downside, except that we have a much smaller house than many of our peers. But, our payment is a lot more manageable. If you don't have a burning need to keep up with the Joneses, there's no real downside. I do kinda need a new couch, but lord knows somebody tiny would just spit up on it anyway, so I can wait.
I'm actually working part-time now that we have kids, and we support the family on his income while my tiny income goes towards the pending kid-mobile car and college accounts and unexpected expenses and stuff like that.
posted by Eyebrows McGee at 7:28 AM on March 28, 2011
There isn't really a downside, except that we have a much smaller house than many of our peers. But, our payment is a lot more manageable. If you don't have a burning need to keep up with the Joneses, there's no real downside. I do kinda need a new couch, but lord knows somebody tiny would just spit up on it anyway, so I can wait.
I'm actually working part-time now that we have kids, and we support the family on his income while my tiny income goes towards the pending kid-mobile car and college accounts and unexpected expenses and stuff like that.
posted by Eyebrows McGee at 7:28 AM on March 28, 2011
Someone will say this, but dude, if you have credit card debt, pay that off first! 14-29 percent interest will kill you. If you have zero savings, out some aside, as an emergency fund, but really, you need to get that CC debt out of the way. It will be amazing how much faster you can save money when you aren't constantly losing it to the interest.
Google "Debt snowball" for more info.
posted by rockindata at 7:32 AM on March 28, 2011
Google "Debt snowball" for more info.
posted by rockindata at 7:32 AM on March 28, 2011
There are no downsides to this plan. The ability to do this will also stand you in good stead over the long term, in case you face unemployment or extended maternity later. Pay off the CC bills first, then start saving.
posted by DarlingBri at 7:48 AM on March 28, 2011
posted by DarlingBri at 7:48 AM on March 28, 2011
Terminology is important here. He isn't spending gut money and you aren't saving all of your money. Your family is saving 50% of your total family income and is controling expenditures for your mutual future benefit. It may happen that it is convenient to separate this by the check distinction, but make no mistake - you both need to be on the same page of sacrifice. For what its worth, my ex wife and I were not on the same page on saving and I found out the hard way that my sacrifices were neither shared nor respected.
posted by Nanukthedog at 7:58 AM on March 28, 2011 [1 favorite]
posted by Nanukthedog at 7:58 AM on March 28, 2011 [1 favorite]
Response by poster: I want to thank everyone for the replies. This sounds like this is a great idea. Logistically it will be a pain initially, but after that I think we will be much better off in the long run!
Down with debt!!!
posted by MayNicholas at 8:12 AM on March 28, 2011
Down with debt!!!
posted by MayNicholas at 8:12 AM on March 28, 2011
Consolidate your debt, be aggressive with the payments.
Ensure you have enough for the necessities, reduce your spending on everything else.
Once your debt is paid off, start putting a big chunk of money into a 6 month emergency fund.
Once the emergency fund is paid up, start putting all your excess money into a 401k.*
Continue with this pattern, then retire early with a bunch of money.
* Optional: Refinance your mortgage at a lower rate, make more than the required payment.
posted by blue_beetle at 8:16 AM on March 28, 2011
Ensure you have enough for the necessities, reduce your spending on everything else.
Once your debt is paid off, start putting a big chunk of money into a 6 month emergency fund.
Once the emergency fund is paid up, start putting all your excess money into a 401k.*
Continue with this pattern, then retire early with a bunch of money.
* Optional: Refinance your mortgage at a lower rate, make more than the required payment.
posted by blue_beetle at 8:16 AM on March 28, 2011
The other would be where I deposit my paycheck and doesn't get used until we can knock off one credit card bill in full at a time- then start building it again.
I'm no expert, but wouldn't it make more sense to pay off chunks of each card as you get the money, instead of waiting until you can pay each one off in full? I doubt your savings account is earning more interest than the credit card company is charging you on that debt.
Regarding your initial question, I agree with the other commenters that it might cause less future strife if you think of it as saving $Y/month, where Y just happens to equal your salary but really is contributed equally by each of you.
posted by vytae at 8:30 AM on March 28, 2011 [1 favorite]
I'm no expert, but wouldn't it make more sense to pay off chunks of each card as you get the money, instead of waiting until you can pay each one off in full? I doubt your savings account is earning more interest than the credit card company is charging you on that debt.
Regarding your initial question, I agree with the other commenters that it might cause less future strife if you think of it as saving $Y/month, where Y just happens to equal your salary but really is contributed equally by each of you.
posted by vytae at 8:30 AM on March 28, 2011 [1 favorite]
This is essentially what we do. It's much easier with (95%) merged finances. One nice thing about merging finances is that it isn't that we save "her" money and live off "my" money. We live on and save "our" money. It doesn't sound like a big deal, but making less about the individual and more about the couple has helped us make the financial plan. There are fewer metal barriers to moving money about, for one thing.
posted by bonehead at 8:31 AM on March 28, 2011 [1 favorite]
posted by bonehead at 8:31 AM on March 28, 2011 [1 favorite]
My husband and I are doing this right now! It is working wonderfully for us, and really is just an easy way to change our thinking about our income. It has ended up being easier to think per check, since that is how we calculate our income and set up our budget. We don't think about "my" income as far as living budget, because it goes directly to cc bills or savings. For some reason this has been way more effective than saying dollar amounts. I don't know why, but it is working. The debt is going down fast and the savings account exists for once!
posted by Swisstine at 8:41 AM on March 28, 2011
posted by Swisstine at 8:41 AM on March 28, 2011
Oh, and we were only putting money to savings so we could pay the taxes we owe this year... And they are paid as of today! So back to "my" checks going to decrease debt!
If nothing else, trying this kind of system will lead to figuring out what works best for your family!
posted by Swisstine at 8:49 AM on March 28, 2011
If nothing else, trying this kind of system will lead to figuring out what works best for your family!
posted by Swisstine at 8:49 AM on March 28, 2011
We do a variation of this - each put in half of our monthly earnings into a joint account that pays for everything - fuel, food, mortgage, bills, pets, insurances, entertainment. Then, whatever is in our personal accounts is offset against our mortgage, reducing interest but giving us relative freedom. We don't have other debts - in your situation I would put every available cent from wherever I could find it against the credit card debt. We've tried many/various permutations of coupled moneydom and this is the one that works for us.
posted by honey-barbara at 8:54 AM on March 28, 2011
posted by honey-barbara at 8:54 AM on March 28, 2011
There is, or can be, one potential con. Because one of you is making the money on which you live there might be a tendency for that person to take control of all the spending, leaving you feeling that you must justify each purchase that you make. This is something that you can work through, and it's not certain to happen anyway.
However, I'm in agreement with everyone else. Yeah, you should do this.
posted by It's Never Lurgi at 9:21 AM on March 28, 2011
However, I'm in agreement with everyone else. Yeah, you should do this.
posted by It's Never Lurgi at 9:21 AM on March 28, 2011
I think it's an awesome plan, but one thing you said leads to me to throw in this little advice.
posted by advicepig at 9:36 AM on March 28, 2011
Right now we have separate accounts, but the thought would be to 2 shared accounts. Both with both of our names on them, but one where he deposits his paycheck, all bills are paid from & all purchases are made from. The other would be where I deposit my paycheck and doesn't get used until we can knock off one credit card bill in full at a time- then start building it again.If you save up and pay them off in one big chunk, you will be paying a lot more in interest than if you just paid as much as you could each month. You'll be out of debt sooner paying monthly. I know there's something very psychologically awesome in paying it off in one big chunk, but just be aware of the cost.
posted by advicepig at 9:36 AM on March 28, 2011
MayNicholas: The other would be where I deposit my paycheck and doesn't get used until we can knock off one credit card bill in full at a time- then start building it again.
That's the only part that seems odd to me. If interest is accrued continually then wouldn't it make more sense to knock it down as much as possible as quickly as possible?
I've run a quick calculation for a simplified example:
debt: $10,000
interest: 10%/y
ability to pay/save: $500/month
monthly minimum payment: 1% of balance + interest (typical formula)
If you only make minimum payments you will be capable of paying off the balance in 24 months and you will pay a total of $11,865. If you pay the full $500 every month you will be done in 22 months and you will pay a total of $10,885. For this example you will be done 2 months sooner and you will have saved $1,000. Obviously the differences in time and money will be more or less drastic depending on your actual total debt, interest rate and monthly payment ability...
posted by Hairy Lobster at 9:39 AM on March 28, 2011
That's the only part that seems odd to me. If interest is accrued continually then wouldn't it make more sense to knock it down as much as possible as quickly as possible?
I've run a quick calculation for a simplified example:
debt: $10,000
interest: 10%/y
ability to pay/save: $500/month
monthly minimum payment: 1% of balance + interest (typical formula)
If you only make minimum payments you will be capable of paying off the balance in 24 months and you will pay a total of $11,865. If you pay the full $500 every month you will be done in 22 months and you will pay a total of $10,885. For this example you will be done 2 months sooner and you will have saved $1,000. Obviously the differences in time and money will be more or less drastic depending on your actual total debt, interest rate and monthly payment ability...
posted by Hairy Lobster at 9:39 AM on March 28, 2011
Response by poster: What I think we will do is pay all the minimums on the credit cards with the main account (his income) and at the end of each month after the minimum has been paid pay the saved amount (my total income) towards one card at a time. All of his cards should be paid of in about 3-4 months this way. Then we can work on my monster card- mine has the lowest APR. Would that be they way to do it?
posted by MayNicholas at 9:42 AM on March 28, 2011
posted by MayNicholas at 9:42 AM on March 28, 2011
My wife and I did this when she was starting to build her business. We lived on my income and saved hers in case her business didn't become profitable or we needed to reinvest the profits in her future. It was a great idea for us and worked out perfectly. The only time I think it could be a problem is if you are not of the pooled income/shared bank account school. Then I could imagine conflicts between some couples over the usual issues couples face surrounding money as it can be a proxy for control of the direction of the relationship in general. We've always pooled our money and made decisions jointly, so it was super-easy for us. We sometimes had disagreements about what discretionary spending needed to be removed and what spending was the priority, but we worked it out the same we work all issues out, lots of talking and listening and deciding together what the best path is. We did it in Richmond, as well. Go VCU!
posted by Lame_username at 9:43 AM on March 28, 2011
posted by Lame_username at 9:43 AM on March 28, 2011
Yes, you should make the minimum payments as scheduled and then put the "excess" towards whatever card has the highest APR until it is paid off. Then move on the next higher APR and so on. Also, keep an eye out for attractive balance transfer options from cards once you pay them off. Sometimes they will give you 0% for 6 months in an effort to entice you back into debt with them. If they offer it, take it!
posted by Lame_username at 9:45 AM on March 28, 2011 [1 favorite]
posted by Lame_username at 9:45 AM on March 28, 2011 [1 favorite]
MayNicholas: What I think we will do is pay all the minimums on the credit cards with the main account (his income) and at the end of each month after the minimum has been paid pay the saved amount (my total income) towards one card at a time. All of his cards should be paid of in about 3-4 months this way. Then we can work on my monster card- mine has the lowest APR. Would that be they way to do it?
That sounds much more reasonable. Here is my 2c on this:
1) if you're capable of paying off all your cc debt that quickly and if you're determined to do this and not bail out on the plan half way I would try to do the following: if you're able to get an additional credit card with a promotional 0% interest rate on transferred balances for more months than it'll take you to pay it all off this could save you a lot of money in terms of interest. Do NOT do this if you're not absolutely certain that you'll be able to pay the entire transferred balance off because you'll be paying high interest on leftover balances for the entire timespan. Also, please note that opening additional cards will likely ding your credit score for the time being. But that may be worth it to you considering the interest you may not have to pay.
2) if (1) isn't the right thing for you: always pay off the card with the highest interest rate first. Order all your cards by interest rate and put all extra money left after minimum payments into the one with the highest interest rate.
posted by Hairy Lobster at 9:52 AM on March 28, 2011
That sounds much more reasonable. Here is my 2c on this:
1) if you're capable of paying off all your cc debt that quickly and if you're determined to do this and not bail out on the plan half way I would try to do the following: if you're able to get an additional credit card with a promotional 0% interest rate on transferred balances for more months than it'll take you to pay it all off this could save you a lot of money in terms of interest. Do NOT do this if you're not absolutely certain that you'll be able to pay the entire transferred balance off because you'll be paying high interest on leftover balances for the entire timespan. Also, please note that opening additional cards will likely ding your credit score for the time being. But that may be worth it to you considering the interest you may not have to pay.
2) if (1) isn't the right thing for you: always pay off the card with the highest interest rate first. Order all your cards by interest rate and put all extra money left after minimum payments into the one with the highest interest rate.
posted by Hairy Lobster at 9:52 AM on March 28, 2011
Also, keep an eye out for attractive balance transfer options from cards once you pay them off. Sometimes they will give you 0% for 6 months in an effort to entice you back into debt with them. If they offer it, take it!
...
if you're able to get an additional credit card with a promotional 0% interest rate on transferred balances for more months than it'll take you to pay it all off this could save you a lot of money in terms of interest
Note that many of these balance transfer offers charge a fee of a percentage of the balance, which could cost you as much or more than the interest would have been otherwise. Make sure to read all of the fine print before trying something like this.
posted by burnmp3s at 10:18 AM on March 28, 2011
...
if you're able to get an additional credit card with a promotional 0% interest rate on transferred balances for more months than it'll take you to pay it all off this could save you a lot of money in terms of interest
Note that many of these balance transfer offers charge a fee of a percentage of the balance, which could cost you as much or more than the interest would have been otherwise. Make sure to read all of the fine print before trying something like this.
posted by burnmp3s at 10:18 AM on March 28, 2011
My husband and I are doing this right now. We've been living off of my (stable, day-job) income for about six months and putting his (variable, freelance) income in savings. It's enabled us to build a really, really healthy savings account which was going to go towards paying off our student loans in one fell swoop, but now it's enabled us to up and move to a new city -- where we'll be living off of his income until I get a job. Since we've already had practice living off of one income, there's no concern about me not having a job before we go.
What I think we will do is pay all the minimums on the credit cards with the main account (his income) and at the end of each month after the minimum has been paid pay the saved amount (my total income) towards one card at a time. All of his cards should be paid of in about 3-4 months this way. Then we can work on my monster card- mine has the lowest APR. Would that be they way to do it?
How much of an emergency fund do you already have in place? If the answer is anything less than 3-6 months expenses, I would continue to pay minimums on all the cards while putting additional income into savings. Once you hit an emergency fund you're comfortable with, THEN start paying down the cards. This is called "snowballing".
posted by peanut_mcgillicuty at 11:07 AM on March 28, 2011
What I think we will do is pay all the minimums on the credit cards with the main account (his income) and at the end of each month after the minimum has been paid pay the saved amount (my total income) towards one card at a time. All of his cards should be paid of in about 3-4 months this way. Then we can work on my monster card- mine has the lowest APR. Would that be they way to do it?
How much of an emergency fund do you already have in place? If the answer is anything less than 3-6 months expenses, I would continue to pay minimums on all the cards while putting additional income into savings. Once you hit an emergency fund you're comfortable with, THEN start paying down the cards. This is called "snowballing".
posted by peanut_mcgillicuty at 11:07 AM on March 28, 2011
peanut_mcgillicuty: How much of an emergency fund do you already have in place? If the answer is anything less than 3-6 months expenses, I would continue to pay minimums on all the cards while putting additional income into savings. Once you hit an emergency fund you're comfortable with, THEN start paying down the cards. This is called "snowballing".
I dunno. Debt should be paid off first if possible. Especially if the horizon for doing so is just a few months as the OP claims. That's short enough to be able to tell whether the job/income situation is stable for that period of time. If the risk of losing income is relatively low then saving money by minimizing interest payments is the smart thing to do IMHO. For most people building a 6 month emergency fund is a longer term project and if it's essentially being eaten up by as you build it by interest accumulation on the liability side it seems like a losing proposition. I vote for rapidly getting rid of all debt and then building up savings.
Motley Fool's take on the order of saving and investing: (1) get rid of high-interest debt (2) build emergency fund (3) fund advantaged retirement accounts (4) fund regular investment accounts
posted by Hairy Lobster at 11:21 AM on March 28, 2011
I dunno. Debt should be paid off first if possible. Especially if the horizon for doing so is just a few months as the OP claims. That's short enough to be able to tell whether the job/income situation is stable for that period of time. If the risk of losing income is relatively low then saving money by minimizing interest payments is the smart thing to do IMHO. For most people building a 6 month emergency fund is a longer term project and if it's essentially being eaten up by as you build it by interest accumulation on the liability side it seems like a losing proposition. I vote for rapidly getting rid of all debt and then building up savings.
Motley Fool's take on the order of saving and investing: (1) get rid of high-interest debt (2) build emergency fund (3) fund advantaged retirement accounts (4) fund regular investment accounts
posted by Hairy Lobster at 11:21 AM on March 28, 2011
Once you get the credit card debt paid off, you might want to add a refinement. Split "your" check in two parts. One part goes to an account for emergencies and big ticket items, the other part goes towards long term savings. Having a separate account for the big ticket items, it is very easy to tell when you can afford things like a special vacation, home theater system or a new car that you can pay cash for. Just take the balance in that account, subtract the cushion for emergencies and what is left is the money for your special, big ticket items. Meanwhile, the other account is invested in long-term savings that you don't ever touch (maybe part of it for downpayment on a house, your kids' college education, your own retirement - but mentally once money goes in, it becomes unspendable).
posted by metahawk at 1:40 PM on March 28, 2011
posted by metahawk at 1:40 PM on March 28, 2011
Just wanted to add that I had a job where I was able to work part time after my kids were born - I really enjoyed being able to go for to work for a few hours every day and it made me much happier to see my kids when I picked them up at lunch time. And my salary still went into the two savings account since we were living on the edge of my husband's income.
posted by metahawk at 1:42 PM on March 28, 2011
posted by metahawk at 1:42 PM on March 28, 2011
Hairy Lobster: I still think it's a good idea to save up an emergency fund in case of layoffs, moves, or whatever before paying down debt, even high interest debt. The OP asked whether we're doing her plan ourselves, to which my answer is yes, and this is how. Dave Ramsey's baby steps agree with me there, although we did set our emergency fund bar higher than he does, but then we have a variable freelance income to contend with so felt we needed more of a cushion.
posted by peanut_mcgillicuty at 5:11 PM on March 28, 2011
posted by peanut_mcgillicuty at 5:11 PM on March 28, 2011
As people debate which is better (build emergency fund or pay down debt; pay highest interest rate or pay smallest debt) you need to remember that there is not one right way. There is only the way that works best for your family. As long as you know why people give these arguments, you'll be able to choose the one that works for you.
Emergency fund or pay down debt? If life were perfect, it would make more sense to pay down debt first before building savings, because you are losing more money on debt interest than you can possibly make on savings interest (.5% really??). But life is not perfect, and it is likely that you will need something (new water heater, car repairs, flight to attend funeral) before your debt is paid off. If you don't have any savings (emergency fund), where will that money come from? You will have to charge it, thereby increasing your debt. If this keeps up, you will NEVER get out of debt. That's why people advocate building an emergency fund first. If you have $1000 saved up, you can avoid acquiring more debt while you work to pay it off.
Pay highest interest rate or smallest debt? Thinking logically, paying the highest interest rate will help you reduce your total debt faster, since it builds faster than lower rates as they all sit there. But, it is so psychologically satisfying to pay a whole debt off that this may help you to commit to the whole program better than slogging away at something that seems like it will never be gone.
The most important thing to remember is what you've already stated that you will do: commit to spending less so you are not adding to your debt, and agree as a family what your approach will be so you are working together to reach your goal. Beyond that, the details depend on what works best for your family.
posted by CathyG at 9:53 AM on March 29, 2011
Emergency fund or pay down debt? If life were perfect, it would make more sense to pay down debt first before building savings, because you are losing more money on debt interest than you can possibly make on savings interest (.5% really??). But life is not perfect, and it is likely that you will need something (new water heater, car repairs, flight to attend funeral) before your debt is paid off. If you don't have any savings (emergency fund), where will that money come from? You will have to charge it, thereby increasing your debt. If this keeps up, you will NEVER get out of debt. That's why people advocate building an emergency fund first. If you have $1000 saved up, you can avoid acquiring more debt while you work to pay it off.
Pay highest interest rate or smallest debt? Thinking logically, paying the highest interest rate will help you reduce your total debt faster, since it builds faster than lower rates as they all sit there. But, it is so psychologically satisfying to pay a whole debt off that this may help you to commit to the whole program better than slogging away at something that seems like it will never be gone.
The most important thing to remember is what you've already stated that you will do: commit to spending less so you are not adding to your debt, and agree as a family what your approach will be so you are working together to reach your goal. Beyond that, the details depend on what works best for your family.
posted by CathyG at 9:53 AM on March 29, 2011
Best answer: OK, I was really curious about this so I made a fairly complex spread sheet to see the difference certain strategies would make. I made up a hypothetical scenario and ran it through 2 variants of 3 strategies. I injected random emergency expenses averaging at $5,000/year. Of course the exact distribution of these will vary the result somewhat but not too much.
It turns out that both peanut_mcgillcuty and myself may be partially right and partially wrong here: at least in the scenario I posed building an emergency fund first is actually cheaper in the end. However, in the given scenario, it's not the optimum approach either. Turns out there is a butter zone here (see strategy 4 below)! The butterzone appears to be a 66/44 split of available funds between paying off debt and building an emergency fund.
(DISCLAIMER: this is just my amateurish fudging around with spreadsheets. IANAE/IANAA. And it would take a lot more testing with various scenarios to figure out if the 44/66 split is always the butter zone or if that varies depending on some of the parameters! This is not financial advice!)
Anyhow, here goes...
SCENARIO:
cc debt: $20,000
interest: 14.65 (national average 2010)/year
minimum payment: 1% principal + interest/month (typical formula)
net income: $4,000/month
expenses: $3,000/month
funds available for debt reduction/saving: $1,000/month
emergency fund savings goal (variant 1): $9,000 (3x expenses/month)
emergency fund savings goal (variant 2): $18,000 (6x expenses month)
annual emergency needs: $5,000 (spread out randomly at between $1,000 and $5,000 per incident)
STRATEGIES:
1) EMERGENCY FUND FIRST: (1) make minimum cc payments; (2) put all money left over into emergency fund until goal reached; (3) then start using extra funds to pay off debt; if emergency fund has dipped, refund it first until back to goal amount; in case of emergence deplete fund first, then increase debt
2) DEBT FIRST: (1) pay off as much debt as possible; (2) fund emergency fund only once debt is paid off; (3) in case of emergency increase debt
3) EVEN MIX: (1) make minimum cc payments; (2) put up to 50% of monthly free funds (or what's left if minimum cc payment exceeds 50% of monthly free funds) into emergency savings; (3) use anything left after that to pay off more debt; in case of emergency deplete fund first, then increase debt
4) BUTTER ZONE: (1) make minimum cc payments; (2) put up to 44% of monthly free funds (or what's left if minimum cc payment exceeds 66% of monthly free funds) into emergency savings; (3) use anything left over after that to pay off debt; in case of emergency deplete fund first, then increase debt
RESULTS:
strategy 1 variant 1 (emergency fund first, emergency fund goal 6x monthly expense):
debt paid off in: 99 months
total cost of debt: $37,900
strategy 1 variant 2 (emergency fund first, emergency fund goal 3x monthly expense):
debt paid off in: 78 months
total cost of debt: $34,400
strategy 2 variant 1 and 2 (debt first, emergency fund goal 6x monthly expense, result is identical for obvious reasons):
debt paid off in: 54 months
total cost of debt: $49,200
strategy 3 variant 1 (mix of emergency funding and debt payoff, emergency fund goal 6x monthly expense):
debt paid off in: 72 months
total cost of debt: $32,500
strategy 3 variant 2 (mix of emergency funding and debt payoff, emergency fund goal 3x monthly expense):
debt paid off in: 67 months
total cost of debt: $32,500
strategy 4 variant 1 (butter zone mix of 44% emergency funding and 66% debt payoff, emergency fund goal 6x monthly expense):
debt paid off in: 59 months
total cost of debt: $31,400 (WINNER)
strategy 4 variant 2 (butter zone mix of 44% emergency funding and 66% debt payoff, emergency fund goal 3x monthly expense):
debt paid off in: 62 months
total cost of debt: $31,400 (WINNER)
posted by Hairy Lobster at 5:40 PM on March 29, 2011
It turns out that both peanut_mcgillcuty and myself may be partially right and partially wrong here: at least in the scenario I posed building an emergency fund first is actually cheaper in the end. However, in the given scenario, it's not the optimum approach either. Turns out there is a butter zone here (see strategy 4 below)! The butterzone appears to be a 66/44 split of available funds between paying off debt and building an emergency fund.
(DISCLAIMER: this is just my amateurish fudging around with spreadsheets. IANAE/IANAA. And it would take a lot more testing with various scenarios to figure out if the 44/66 split is always the butter zone or if that varies depending on some of the parameters! This is not financial advice!)
Anyhow, here goes...
SCENARIO:
cc debt: $20,000
interest: 14.65 (national average 2010)/year
minimum payment: 1% principal + interest/month (typical formula)
net income: $4,000/month
expenses: $3,000/month
funds available for debt reduction/saving: $1,000/month
emergency fund savings goal (variant 1): $9,000 (3x expenses/month)
emergency fund savings goal (variant 2): $18,000 (6x expenses month)
annual emergency needs: $5,000 (spread out randomly at between $1,000 and $5,000 per incident)
STRATEGIES:
1) EMERGENCY FUND FIRST: (1) make minimum cc payments; (2) put all money left over into emergency fund until goal reached; (3) then start using extra funds to pay off debt; if emergency fund has dipped, refund it first until back to goal amount; in case of emergence deplete fund first, then increase debt
2) DEBT FIRST: (1) pay off as much debt as possible; (2) fund emergency fund only once debt is paid off; (3) in case of emergency increase debt
3) EVEN MIX: (1) make minimum cc payments; (2) put up to 50% of monthly free funds (or what's left if minimum cc payment exceeds 50% of monthly free funds) into emergency savings; (3) use anything left after that to pay off more debt; in case of emergency deplete fund first, then increase debt
4) BUTTER ZONE: (1) make minimum cc payments; (2) put up to 44% of monthly free funds (or what's left if minimum cc payment exceeds 66% of monthly free funds) into emergency savings; (3) use anything left over after that to pay off debt; in case of emergency deplete fund first, then increase debt
RESULTS:
strategy 1 variant 1 (emergency fund first, emergency fund goal 6x monthly expense):
debt paid off in: 99 months
total cost of debt: $37,900
strategy 1 variant 2 (emergency fund first, emergency fund goal 3x monthly expense):
debt paid off in: 78 months
total cost of debt: $34,400
strategy 2 variant 1 and 2 (debt first, emergency fund goal 6x monthly expense, result is identical for obvious reasons):
debt paid off in: 54 months
total cost of debt: $49,200
strategy 3 variant 1 (mix of emergency funding and debt payoff, emergency fund goal 6x monthly expense):
debt paid off in: 72 months
total cost of debt: $32,500
strategy 3 variant 2 (mix of emergency funding and debt payoff, emergency fund goal 3x monthly expense):
debt paid off in: 67 months
total cost of debt: $32,500
strategy 4 variant 1 (butter zone mix of 44% emergency funding and 66% debt payoff, emergency fund goal 6x monthly expense):
debt paid off in: 59 months
total cost of debt: $31,400 (WINNER)
strategy 4 variant 2 (butter zone mix of 44% emergency funding and 66% debt payoff, emergency fund goal 3x monthly expense):
debt paid off in: 62 months
total cost of debt: $31,400 (WINNER)
posted by Hairy Lobster at 5:40 PM on March 29, 2011
Argh! Bad typo. The butterzone split is at 44/56 for the emergency savings/debt payoff split.
Duh.
(The sheet's math should still be ok though. I only specify one of the 2 numbers. That was just me getting all excited about my findings and losing teh mathz during posting.)
Thanks for pointing it out CathyG!
posted by Hairy Lobster at 9:04 AM on March 30, 2011
Duh.
(The sheet's math should still be ok though. I only specify one of the 2 numbers. That was just me getting all excited about my findings and losing teh mathz during posting.)
Thanks for pointing it out CathyG!
posted by Hairy Lobster at 9:04 AM on March 30, 2011
Response by poster: Wow HairyLobster! That was a crazy thoughtful response! Thanks to everyone who chimed in. I am going to have my other half read over all of these so we can sit down and discuss all of them and come up with out debt crushing plan. Thank you all so much for the intelligent advice!
posted by MayNicholas at 4:52 AM on March 31, 2011
posted by MayNicholas at 4:52 AM on March 31, 2011
This thread is closed to new comments.
Pros:
You pay off your debts.
You pay off your debts faster.
Cons:
......
posted by EndsOfInvention at 6:38 AM on March 28, 2011 [13 favorites]