Start savings plan.. vs cc debt

[dustie]

Age: 30
Spouse’s/Partner's age: 34

Annual gross income from employment or profession: 50,000 + 7.5% bonus
Annual gross income of spouse: 0 (currently student)

Monthly take-home pay: €2700 (might increase in new year when I can claim tax credits for partner)

Type of employment: Private sector, secure
Partner: In college

In general are you:
(a) spending more than you earn, or just breaking even


Rough estimate of value of home €250k
Amount outstanding on your mortgage: €160k
What interest rate are you paying? Tracker 1,2%+ECB

Other borrowings – None

Do you pay off your full credit card balance each month? No
If not, what is the balance on your credit card? 10,000 over 2 cards, €400 per month, but have been dipping back into that last few months with wedding.

Savings and investments: 5,000 from wedding gifts after all expenses paid

Do you have a pension scheme? Yes, defined benefit pension

Do you own any investment or other property? No

Ages of children: n/a

Life insurance: Yes


What specific question do you have or what issues are of concern to you?
We have just got married, and finished paying for the day. We have approx. 5000 from gifts. We were saving for the wedding but my partner was unemployed and went back to college so we had just my income. As we weren’t married we weren’t entitled to any sharing of tax credits, yet he wasn’t entitled to any social welfare as we were living together.
So I want to try and sort out our finances now and start saving for rainy day funds as well as maybe changing the car in next while. We built our house on family land so thankfully not in negative equity and have a tracker. Credit card debt mainly used through finishing and furnishing house.
I want to work out a proper savings plan. I know the obvious thing to do is to use the 5k to clear the credit card debt.. but part of me wants to try and pay it back monthly without dipping into this money. Is this achievable or totally daft? I just know how hard it is to get money like that saved the hard way.

 

[wbbs]

Daft in my opinion to save the 5k and continue with 10k credit card debt. Work at clearing the credit card as soon as possible and then you can start to save. Do you know what interest rate you are paying on the credit card?

 

[Macstuff]

Daft - you are probably earning less than 3% on your 5k lumpsum and paying around 15%-18% on your Credit Card debt. Therefore you are not saving money, you are losing it.
The option you should use is to use the 5k to reduce the CC debt and then work as hard as possible to clear the remaining 5k. Once you have done that, only then should you start saving.

 

[rekhib]

From a purely numerical point of view, daft seems to be the word of choice but @dustie, I'm inclined to think you should save or invest it. I've had a balance on my credit card since before I can remember and whenever a lump sum (irrespective of size) presents itself, I always save/invest rather than pay it off the card. It seems to be a purely pyschological effect (something to do with the segmentation of money). Personally, I'd rather have E10k debt and E5k cash rather than E5k debt, particularly for rainy day scenarios &c. By the sounds of things, you have a decent income and your partner will also likely have some income in the next few years. Plus the card debt seems to have accumulated via once-off purchases rather than through a structural shortfall in income vs. expenditure. Perhaps don't let the credit card creep up any more and of course, the worst scenario would be spending the E5k.

 

[wbbs]

Psychologically it may be better, financially it is not. Rainy day fund is a good idea but if you pay the 5k off your credit card and leave your limit alone then if some emergency happens you do still have access to the credit card funds, if no emergency occurs then you have saved loads in interest.

 

[SarahMc]

I'm another one who likes to have savings even if I have debt. I find having a rainy day fund is an incentive to save more, and it's much harder to spend saved money than to spend on a credit card.

It's a psychological trick, and one the Credit Union movement is built on. Only you know what debt/savings ratio will work for you personally.

 

[Bronte]

I just know how hard it is to get money like that saved the hard way.

Money saved the hard way is a good thing.

My advice is that you pay off the credit card debt and then throw everything you have at the debt. For the future you should try to save for purchases instead of using the credit card. Best way to save is you take it from your current account straight after your salary comes in.

 

[LDFerguson]

I acknowledge the psychological effect of "having savings" but it really is costing you money. As wbbs pointed out, you might be getting 2% interest net of DIRT tax on your savings if it's getting any interest at all. €5,000 x 2% = €100 interest per year.

The same €5,000 of credit card debt is costing you at least €600 per year in interest. That's €500 per year of a difference - €500 that you're giving to a bank for psychological reasons. What else could you buy with €500?

Pay off the credit card debt with your savings and continue to pay at least €400 per month off the credit cards until they're gone. It might help to write down a target e.g. - "I will pay off the credit card debt by 31st March 2014." Think of a reward for achieving that target, e.g. something frivolous that costs €400. Buy that out of the following month's salary because you'll have no credit card to pay. The month after, start rebuilding your savings.

Credit card debts are dangerous because of their ease of access. That's why you have to be severe with yourself and allow no lapses. It's all too easy to think - "well there's about €4,000 of a balance on the card so what harm will this little purchase for €100 do?" That's how credit card balances end being around perpetually. The only way to get out from under them is to clear them off in full and only buy what you can afford in cash.

As regards the psychological "rainy-day" aspect of savings, if you pay off the credit card in full and then the rainy day arrives shortly after, you can simply pay for whatever the rainy day is with your savings.