What should I do with the money?

In My Humble Opinion
1

Here’s the problem(s).

  1. My debt: I went into debt management after racking up $26,000 in credit card bills. I have slaved to shave it down to $10,000.
  2. My car: It’s 20 years old, ugly, but dependable. It may not pass another ‘test-only’ smog check, and it may break down at any moment.

So in addition to paying $800 a month to my debt, I have been putting money in a savings account for a car. That account now has $1,000. But then I started thinking. This money could help me get out of debt faster, and reducing the overall amount I have to pay(saving on interest)!

OTOH, I want another vehicle. One with better gas mileage that’s not an eyesore.

What would you do?
a) use the savings account to help pay off the debt.
or
b) keep putting money into the account to get the new(or newer) vehicle?

Your input will be greatly appreciated.

2

I vote for paying of the debt. Once the debt is paid, your savings will increase faster because you won’t be paying finance charges.

3

Depends on how much you need the car and if you won’t be able to get the registration renewed if it can’t pass the smog test.

IMHO, I’d pay half on the debt and keep the other as a nest egg so you could make a down payment on your car if it dies on you.

And kudos to you for working yourself out of an extremely difficult situation. That takes guts and discipline of the first water.

4

Congratulations on your progress, spooje! It sounds like you’ve really turned things around and changed your behavior. That is a tremendously difficult thing to do.

Here’s the deal: car payments suck.

Unless you’re living with your parents and can tap them for emergencies, I vote for hanging onto the money for now. Why? Because you have an older car, chances are good you’ll need the money for a repair or two. $1,000 is a nice little emergency cushion for people. And I believe every prudent person should keep a grand or so stashed away for emergencies.

Sure, you’ll save a few dollars on the interest FOR NOW if you put the $1,000 toward the debt. But if something goes wrong, you need a car repair, you’re stuck. If you need the car to earn a living, you won’t even have a down payment to get into a reliable used car. So that leaves you with only one option: going 12,000 or more into hock to get a new car with zero down.

And if that happens , you’ve blown all that great progress you’ve made paying down your c-card bills, and done it for a rapidly depreciating asset. It would be a financial disaster.

I’d sit tight on that 1,000 for now. Good generals don’t go into battle without a reserve in hand for emergencies and opportunities. Neither should you.

The emotional wear and tear of going through life with zero emergency fund set aside–where every little setback is a mountain–isn’t worth a few lousy interest dollars.

If the upside of sending that money toward debt payment is a few tens of dollars each month, and the downside risk is 4 more years of debt (car payments), then going without an emergency fund is a gamble you can’t afford to lose.

Never make such gambles.
That’s my take. :slight_smile: Good luck!

5

I second PM[sup]2[/sup]'s reco. Most financial analyst would say that you need an emergency fund, so I would stick with that route. However, depending on where you reside, you could also try doing life without a car for a while. If you can realistically do this then you don’t need to live in dread of the final breakdown, car repairs, et al, plus you would shed overhead for insurance and maintenance.

Also, make sure that you are getting the maximum safe interest out of this small nest egg, and make sure you minimize the interest you pay on your outstanding debt.

Back in the day when I used to carry debt I would constantly ask the credit card company if they could give me a lower rate. The game works like this: Credit Card company X sends you some junk mail saying they will give you 2.9% interest rate for 1 year if you transfer your balance. So you call your own company and use the possibility of change as leverage. This is better for your credit rating because you are not card hopping. If you still have debt with multiple creditors you should pay off first the debt which carriest the highest APR and consolidate as much as possible, to the lowest APR, of course.

6

Depends on where you live. If you can get by without a car, pay off debt first.

7

Some things in life are assets, some are expenses. Cars are almost always expenses. When you do need to buy a newer car, my suggestion is a 3 or 4 year old model, to maximize the life left in the car and minimize the cash outlay. Also, your car hasn’t broken down yet, so I would wait until it actually has gasped its last breath before replacing it (oh, and make sure you can pay off the car loan early with no penalties, too, and do so. My $4600 car cost me about $20 in interest because I paid the loan off in 6 months.)
Actually, I would keep going as I am if I were you. It sounds like you have a healthy ratio of “debt payments vs. savings” going on (I’m guessing about 90/10?), so you are working on two fronts at the same time. Keep on paying the majority of money to the debt, and keep on putting a little away for the car each month. Maybe your present to yourself for knocking off such a large debt would be to buy yourself the newer car.

8

I couldn’t disagree more. If you have $1,000 and debt of over $1,000, it is horrible economics to let the $1,000 sit in the bank. Pay down the debt. If your car breaks, you can always use the credit to fix it. Yes, having a reserve is important. But $1,000 in the bank minus $10,000 in debt is not a reserve; it’s a debt, a big one. Very bad advice there.

spooje, you’ve no doubt suffered some to get your debt closer to under control. That’s really excellent. My advice is to suffer a bit more until it’s completely under control, i.e. gone. Go without the nicer car for now. Make it a personal goal: when the debt is zero, you get another car. powerful incentives, those things can be. And as I say, if you get in a pinch along the way because this car breaks, well you’re not being unreasonable to increase your debt to fix it.

9

Let’s try a little speculative math here:

At $800 a month, you’ll pay off the debt in 12 1/2 months. A thousand bucks would knock a month off. If you did that right now, how much would that save? At least the current month’s interest, plus consistently decreasing portions of the interest you would have had to pay on that grand for the life of the loan.

Since my math skills are terrible, I won’t even go near this problem, but you could probably get a rough estimate. (or some helpful doper could try, hint, hint).

On the other side, there’s the amount that grand would earn in your savings account for a year.

Compare the two figures.

That’s one element to figure. Here’s another: if your car dies, what kind of hassle do you have to go through to get it fixed or to buy another one? By that I mean both physical trouble (getting the car to a shop, getting rides to work), and financial (do you have any credit at all? Could you put the repairs on a credit card?)

And if you have to buy a car suddenly, what kind of deal would you get with no ready cash available?

So there’s two values to consider: a straight dollar-for-dollar calculation, and the emotional toll it would take to CYA should you have no money in your savings account and the car’s engine blows on the freeway while you’re coming home from work.

Myself, I would opt for determining what your plan would be for your next car, and figuring how much it would cost to get there. That would determine how much you need to save. I’m big on paying car loans off as soon as possible, and I have two paid-off cars (a '90 Festiva, my combat commuter, and a '94 Caravan, the family car) to show for it.

Final answer: there’s no right or wrong answer here. You ARE doing right to pay down the debt, fer sure, but after that, your financial goals and your comfort level with being in debt will determine what your next move should be.

Nothing like asking for answers and getting 200 opinions, eh? :smiley:

10

I live in LA. My commute to work is 48 mile round trip. Public transportation would require 3 buses, or 3 trains just for 1 way. It’s possible, but would be nerve racking and add an hour to my commute.

11

Oh my gosh. Don’t take the BUS in L.A., unless you only need to take one line to get to work. But you need to take three lines? Sounds iffy, and dicey. If you miss one line, your whole schedule is blown. You will probably need to leave extra early, just to anticipate any such problems…adding even MORE time to your commute.

I used to go to art school (Otis, when it was near McArthur Park) from Glendale. I think it was like a 25 -35 minute drive, but a TWO HOUR bus ride. Of course, this was years ago. I have avoided the L.A. bus system for years - I have had my fill. Have it changed much? Do the “schedules” actually mean something, or do they come 5-15 minutes early or late on a whim?

I vote for saving the money for the car, gradually. Just so you don’t have the dread of endless car payments hanging over your head. If you HAD to, you could get a decent little used car with your savings.

I vote a huge NO on taking the bus or train in L.A.

12

You know in California spooje (check your state), the State pays $500.00 to bring your car up to smog & you pay $20.00?

You have to meet some income lines, but they are plenty high. But yes, you read it right, the State pays most all of it now.

13

This sounded fishy, but I looked into it. And he’s right! http://www.smogcheck.ca.gov/StdPage.asp?Body=/geninfo/FactSheets/Consumer_Assistance_Program-Apr_2001.htm