Help a Reader: What to do with Extra Money

Here's a question I received from a reader:

What should I do with $900 I just received from my flex spending account (from childcare expenses)?

Here is the thing..I never finished my associates degree so I finally worked up the nerve to go back to school in June.  Turns out that since I applied to late and will not be able to get financial aid until the fall.  Anyway, the class costs $600 plus $100 for the book.  I could either pay for this class..or just wait until the fall to go back to school.

Should I put money down towards my credit card debt ($3,351) with an average of 26% in interest?  Because of how tight things are financially l usually pay a little bit over the minimum. 

Or should I put the money in savings for an emergency fund?

I am very excited that I started a savings account (ING Direct).  Finally!  I am 31 years old and have never saved before. Also I make 37K a year (as an administrative assistant) and receive between 3 and 4K a year in child support.   

What do you think I should I do with this $$$??

What do you think she should do?

Comments

[Josh]

Credit card debt with an interest rate of 26%? Pay that down no questions asked. Get rid of that as soon as possible, then don't rack up any more and begin saving in that ING savings account. Look for ways to cut any extra expenses out and put that towards you debt to get it gone as soon as you can. That 26% is money that is just being thrown away right now and you're best to take care of that first.

[cris]

Pay the credit card debt. You pay a lot of interest. I would also postpone saving until I would payed off the balance. The interest rate is huge. Think about the money you pay every month in interest.

[Tim]

I agree, EASY decision; pay the debt. The now higher available balance on the card can be your emergency fund. Wait until the fall for school. Don't touch ING until CC is paid off. Think of paying the CC as paying into an ING account with 26% interest.

[vivtho]

26% interest is way too high! Pay that off as soon as possible.

Think of it in this way ... if you can pay off your entire credit card balance (it's not that easy, I know), you are basically putting more than $750 in your pocket every year. Another plus point would be that your credit score would also improve (based on your APR I'm guessing your credit score isn't all that good).

[meoip]

Call the CC company and ask them to lower your interest rate. Tell them you are serious about paying it down and will be putting an extra $900 in this month. Not only will you pay 1/3 of your debt off but you could lower your interest rate. In either way keep paying as much as possible to the debit. When you have it paid off put the amount you have been paying in debt into ING & what needed into school.

[Matt]

Rather than limit my comments to the $900, I'd like to address the whole situation.

First, I'm assuming you're already able to document at least $900 spent on childcare expenses? You have to in order to use the money from an FSA.

After that, sit down and list out your liabilities for the coming year. For instance, are the kids school age? Make sure you've budgeted for back-to-school expenses in the fall. The point of all this is to make sure that you don't end up putting the $900 right back on the credit card in a few months.

Make any adjustments you have to so that you're spending less than you earn. Go to one of the free online calculators to figure out how long it will take to pay down the credit card at various monthly payment levels. This way, you'll be taking control and making a plan to have it payed down by a certain date. Think of how great it will be on that day to be free of that monthly payment! For me, the good feeling of just having a plan to get out of debt more than made up for the spending I had to give up to make it a reality.

The ING account can be a great tool here. Assuming you get paid every two weeks, use the ING account to automatically yank out half of your monthly credit card payment on payday. Or, alternatively, set up your direct deposit at work to send some of it to ING. ING's web site should have instructions for that. This way, you never see the money in your checking account until you put it there to pay your monthly credit card bill. I know it's a bit complicated, but this approach helped me. Another thing you can do to speed things up is (still assuming you get paid every 2 weeks) use the third paycheck in your three-paycheck months to pay down the credit card. That makes a big dent.

There's another thing I'd recommend too. When you pay down the credit card by that $900, call up and ask them if they can lower the interest rate. The first customer service rep you speak to will probably lower it a little bit, but ask to speak to his supervisor, because she has the authority to lower it even more. If you've been paying on time, there's a decent chance they'll be willing to do this. It's definitely worth a try. The worst that can happen is they say no. As you continue paying down the card, try again in a few more months.

Once you get out of debt, keep up the deposits to your ING account but not the withdrawals, at least until you have enough savings to cover 3 months' take home pay. It's OK to use the savings to pay for things you otherwise would have had to use credit cards for, like unexpected car repairs.

[MoneyIllusion]

No none of the above, just send it to me...

[FinancialGoal]

I agree with paying down the credit card debt. 26% interest rate is amazingly high. Otherwise, I would transfer that 26% interest rate to a 0% interest rate card if you are offered one.

[bryan]

26%? i have cards where i am being charged 7.29%... what on earth?

[clear1]

Pay off that credit card debit, set-up a monthly savings program and fund a Roth IRA. Tax-free forever...

[Personal Finance Online]

I suggest you invest some of it, for you to have passive income, and the other you save it for a while and think if you will invest it again, if ever your first investment will do well.

[Personal Finance Online]

I suggest you invest some of it, for you to have passive income, and the other you save it for a while and think if you will invest it again, if ever your first investment will do well.

[Jim]

You need to get $1000 in emergency savings. Next, you should look into a part-time job in order to pay off the credit card debt. I assume you have time for a part-time job if you have the time to take a class. Find lower interest rate cards to transfer the debt to and that will help to pay it off faster as you will be paying mostly interest. After paying off the credit card, put away 6 months of living expense. Keep the 6 months in you newly opened ING account.

[No Debt Plan]

As is common with these type of blog posts (across many blogs) is there is just too little detail to decide. If she doesn't have an emergency fund, she needs to get that started.

Does she have a budget? Is she spending less than she is earning? "Money is tight" -- why? Do something to fix it. Then pay off that credit card.

[adam]

paypal it to me, duh

[kitty]

Agree with those who said pay off this debt. To a couple of people who suggest emergency fund first: it is totally ridiculous to put it in a saving (emergency fund or not) where it'll be earning taxable 3% while paying 28%. She'll be wasting money every month. If, on the other hand, she pays off the debt, by the time emergency may or may not happen she'll have reduced the balance on which she pays 28% in a month. She may even will have paid it off, so she'll have more cash flow available. Even if she has to go back in debt to cover an emergency, she'll have saved all this interest between now and the time of emergency.

I am always amazed at people who have credit card debt on which they pay double digit interest that is NOT tax deductible while having some money in the bank earning taxable 3% or 2% after taxes. Then they say, or we need it for emergencies.. Hello? You are loosing money every month leaving less for an emergency and increasing the money you have to pay every month. Totally math-challenged. Oh wait, you have to be math-challenged to get into credit card debt to beging with (barring life and death medical emergency - about the only emergency that may be worth getting into debt for).

[Laughing]

just as others have suggested, 26% is way to high of an interestrate to continue to have....pay downthe debt. But if you need to consider another option it should be to establish an emergency fund of at least 3 months expenses and this could be a good start.

[Lolita]

I'll probably get blasted for this comment but I was in a very similar situation not too long ago. Get that school started as soon as you can. Yes, it will take a good majority of your money now but it puts you one class closer to the end of that degree. Do what you want with the other $200. You've got to start somewhere and I'm here to tell you that it doesn't matter where you stick that money, you are going to feel so much better about things by starting school and knowing that you'll see the light at the end of the tunnel one day in the near future, that is worth so much more than the credit card or savings account. You've got your savings account started, so you're on the right track there. Snowball your credit card and focus on that and the rest will come. Kudos to you for going back to school!!!

Six months ago, I had to borrow money from my parents for the first time in my life. I am a single mother of 3, was making about what you do and the child support wasn't coming in at all and I'm a little older than you. My parents helped me out just enough to get by on and then my mother sent me a personal finance book. I don't know what it was about that book that turned things around for me, but I now have money in stocks, money in savings, my bills are all paid and I should be finished with school in about a year. HANG IN THERE! I've been where you are and you can get where I am :)

[OP]

Hey everyone thank you for your responses!

Yes it was foolish that I took out credit cards with such a high interest rate but really didn't have a choice at the time. For what is worth it has been over a year since I have charged ANYTHING and have paid off about 8K in credit card debt so far. LOLITA - I listened to you and went ahead and paid for the class. I will continue to put every penny I can to get rid of my debt. I am on a budget and have cut costs getting rid of my cell phone/internet/cable and not eating out at all. I shop at thrift stores and get diapers from an organization that helps single mothers in my area. I REALLY REALLY am making an effort and trying to retrain myself (better late than never).

Right now I only have $50 in savings and really am having a hard time making ends meet.

I receive assistance from the state to help cover daycare expenses which would normally cost about 2K a month (basically a little less than what I make in a month). The reason I am saying this is because you can't make more than 40K a year to receive assistance. So if I got a part-time job I would lose this help.. But they will help me with babysitting costs if I go back to school at night... My oldest will be in school in about two years. I'm hoping to be able to get a better paying job by than and not need assistance anymore.

Anyway, I really appreciate all of your advice. Thanks again.

Single Mom from LI

[OP]

ONE MORE QUESTION LOLITA - What book did your parents send you? And can I ask what you went to school for and what you do now?

[Kevin]

OP - good luck to you. Dave Ramsey's book the "Total Money Makeover" is pretty good and very easy to follow in that it is a lot of common sense-type information, but laid out in an organized manner with specific steps to follow.

[Sally]

Why do I get the feeling she just wanted to take the class and was waiting for the 1 comment out of almost 20 to validate it? It makes no mathematical sense, but it's your money, have the guts to do what you want without asking permission. Sheesh.

[Lolita]

OP,

The book was called Prince Charming Isn't Coming: How Women Get Smart About Money. It was a Christmas gift and at first glance, I thought, "How could my mother send me such an awful book?!?" I had been dating a wonderful guy for 6-7 months and she knew that so I really didn't understand. Anyway, I started reading the book and couldn't put it down. I passed it on to a good friend of mine. The funny thing was, it wasn't about the man in my life at all. It was about how I should(and could) be taking care of myself.

I will be more than happy to answer your other questions via email any time you want. My address is lolitasbox@yahoo.com.