Hey everyone, I’m looking for some advice. I think my situation is manageable, but I’m not sure where to start or how to prioritize. My long-term goal is to buy a home, but right now I’m torn between two things: should I focus on aggressively paying down debt, or start saving for a house?
Here are my numbers:
- $1,500 in savings
- $11k in credit card debt at 12%
- $4k car loan at 7.99%
- Monthly expenses: ~$1,500
- Monthly take-home (after tax): $3,300
Would love to hear your thoughts on what the smartest path forward might be. Thank you again
EDIT – I'm located in Canada if that helps
Around 15K in debt at 27
byu/CryptographerAny8894 inpersonalfinance
Posted by CryptographerAny8894
11 Comments
We are in the same boat, and I think we know the answer. Aggressively pay down the debt to avoid interest
I’m not sure when you bought your car, but if your credit score has improved since then I would imagine you can refinance your car loan to get a lower interest rate. 7.99% seems a but high.
Pay off credit card loan in full first.Then we will talk about the rest.Thats the single most damaging thing to your finances.
Homebuyers today should be shooting for about a 20% down payment. That will take some time making 40k. You should not buy a home while in credit card debt. Get that paid off and never go back.
A common way of looking at it is that money paid towards debts is equivalent to investing it at that percent (higher because no taxes). Any debt you have greater than ~5% should take priority over any savings beyond emergency.
Given the numbers you’ve outlined, you have $1800/mo available, and a 1 month emergency fund. People may disagree on the exact numbers, but I would recommend putting 50% into emergency savings and 50% into debt, then once you have about $6k in emergency savings go 100% on debt, prioritizing credit card debt fully over car debt (still make minimum payments).
If “monthly expenses” includes luxuries like entertainment, eating out, trips, etc, then these costs should be pared down and redistributed into debt paydown. Yes it sucks, but the nature of your financial situation dictates cutting back until you are no longer in the red.
BTW, you should not think of emergency savings as regular savings. The purpose is to keep you fed and housed in the worst case scenario. Do not touch it unless you have $0 in your checking account and are at risk of missing a minimum payment, rent, or going hungry.
I think you need to just aggressively put every penny you save each month into that credit card debt and meanwhile see if you can refinance your car at a lower rate. 8% sounds insanely high for a car loan. Avoid making any travel plans or big purchases unless absolutely necessary.
You can’t start saving for a house right now. 12% outpaces average market growth, so it only makes sense to sit on that debt if you plan on investing your money pretty aggressively and feel confident you can make a better RoI than that 12%.
In the future, avoid spending beyond your means. With some discipline, you can pay off the credit card debt in 6-7 months. If you receive a bonus cheque, put that whole cheque into the credit card debt and you can be totally free of it pretty quick.
Get out of debt first. Maybe start doing some gig jobs for extra side income.
What’s the job, are there promotion prospects and can you ask them for more money?
Also you need to reconsider your lifestyle and that means you need to work on your spending psychology,how influenced you are by luxury items, advertisements , and if you are a woman how much you spend on makeup etc.because most the times,there are many unnecessary expenditures which add up…
Also, find a way to invest money NOW, even if you have to save a little at a time and then invest. People tried to give me that advice when I was young and dumb….needless to say, I wish I had listened!!!
Start with paying down high interest credit cards first