Save or Pay off Debt?

41 Replies

Question for you all to see what makes more sense to do right now.

Debt: I have $15k in credit card debt that has an interest rates of 10-16% depending on the card. Minimum monthly is $350 but I usually put a little extra to about $500 just to work it down. Only other debt is a car payment but that isn't going anywhere for a while

So currently I have $9500 saved towards either buying a home or paying debt. I'm planning to buy a multi family home so it will pay for its self, just have to wait for the right one to pop up. That said I'm also wanting to be debt free (minus car). For the last 5 months I've been saving between $1500-2000. Also have a 730 credit score....depending which one you ask and when lol

So my question is should I keep saving for the multi family, or get rid of all of my credit card debt so that my income needs are lower? Part of it also plays into my job, I'm a home inspector and can set my own schedule so if I had less debt I could cut back on how much I had to work and be able to enjoy life more. 

Thoughts and opinions are always appreciated. 

@Zachary Zinn how can you have 15K in cc debt and be saving $1500-$2000 per month for five months at the same time?  Instead of going into debt to save, pay off your cc debt.  You are paying an extra 10-16% interest to save X dollars at 0% interest. 

You should pay the debt, figure you how to save $1500-$2000 after you have paid it... then use the money to invest while being debt from on cc.

@Zachary Zinn

One more vote for paying off credit card, saving as much as you can, then buying your multi family. 

the 15k is old debt, not making more to save. My income is just much larger than my expenses (minimum payments on cc anyways)

Pay off that credit card debt as soon as you can. It makes no sense to keep putting all that money in savings each month to let it sit there, while you have credit card debt costing you 10-16% in interest. 

@Zachary Zinn , Keep your cash for down payment. I'm a lender, and I can tell you- The only thing that counts against you in purchase qualification is that minimum $350/month payment. However, more money down = a better loan, lower rate, lower PMI, better everything.

I preapprove purchasers for a national bank, and I can tell you, however tempting it is to get out of 16% debt- Put more down.  Make the minimum payments until you do.  Cash flow and/or pay the cards off after you purchase.

You will get a better deal, bigger house, better tenants, and we'll have reserves, which I look for in the preapproval process.

Take care.

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@Zachary Zinn

Keep $1,000 for emergency savings, put $8k towards credit card debt. Do everything you can to pay off credit card debt first and foremost.

Then open Vanguard brokerage account and invest in ETF's until you have enough for a 2-4 plex FHA house hack. Then build a reserve fund of $10k or so for multi family repairs/capex.

Then check back once you’re that far.

Just an idea that worked for me.

Originally posted by @Matthew Irish-Jones :

@Zachary Zinn how can you have 15K in cc debt and be saving $1500-$2000 per month for five months at the same time?  Instead of going into debt to save, pay off your cc debt.  You are paying an extra 10-16% interest to save X dollars at 0% interest. 

You should pay the debt, figure you how to save $1500-$2000 after you have paid it... then use the money to invest while being debt from on cc.

I'm in 100% agreement with this, only because I was in a very similar situation not too long ago (from a 'savings-to-debt ratio' perspective). I've used the past year of income from my fulltime job to primarily focus on paying down debt first. Make a plan for it; map it out. 

Get those CCs paid down, and you'll also potentially earn higher credit limits on those existing cards (a good rule of thumb is to keep your utilization lower than 30% of your limit which, if done consistently, can boost your credit score). 

At this point, clear that CC debt so you're not paying as much in interest. Also, though 10-16% isn't terrible by any means, once you start getting that balance paid down and you see a little bit of a boost in your score, consider balance transfer cards with a lower rate. I hope this helps!

@Zachary Zinn your greatest wealth building tool is your income. I personally wouldn’t invest in RE until/unless you are debt free AND have sufficient cash reserves. Otherwise you greatly increase your risk. Remember, investing in a property is on average at least a 5 year commitment.

Pay off as much debt as you can before investing....

@Zachary Zinn if you don’t want to pay off the debt in full I’d suggest transferring the balances to a 0% rate card. This way your not depleting your savings and also not paying 10-16% in interest. There will be a transaction fee but it will be less than what your being charged in interest.

Went ahead and paid of 2 cards and still have a reserve. 1 to go and should have that done within 3 months. 

Thanks again for the advice!

It makes sense to pay your credit cards off, so you pay as little interest as possible.  But in the mean time, you're not making money with a new investment because you don't have the down payment due to paying off the credit cards.  That wealth lost over time = more than the interest you paid on the credit cards.

Work on the CC debt first. That's one less cause for a headache once it's over.

@Zachary Zinn

Save or pay off debt?  Your path forward is dependent on what you value most, there is no single correct path.

This might not be popular opinion but I prefer to pay only a little more than the minimums on debts and then save/invest as much as possible into a variety of things, rather than paying down debts and having nothing left.  This has worked for me (while everything has been going up since 2011) because otherwise I would have been paying down debts while there would have been opportunities that slipped away while I had no investment ready / re-allocatable assets.

If we return to 2009 like scenario again I will change strategy by paying down debts faster, lowest balance first a la "Ramsey", but I will still be saving/investing.

I think it's best to concentrate on getting your net worth to increase each month and to do that, even more than a little extra work hours, you need assets that grow.  I really don't care to pay a debt off a few months early if it means I don't have the savings to participate in an opportunity that comes along.  Would you rather pay a car debt off in 3 years rather than 5, but 30 months from now not have the cash you need to buy a great deal?

Or, if in 30 months you decide the best deal is to pay off your debt early, you'll likely have the cash to do so.

I’m with @Cameron McCown on this.  If you have a deal in front of your the bank is looking at required minimum payments. Not total debt.  So you value is in getting a deal immediately versus paying off credit card debt.  I bought my first deal while I had a much larger chunk of CC debt then you describe.  Then I used my monthly cash flow to pay it off.  

So not only did I get a property sooner but also had some other person pay for my poor CC purchases from two years ago.  

With the 10-16% interest rates, definitely pay down the credit card debt as quickly as possible.  Make sure you keep a bit in your savings.  

Between your savings and income, you can pay the credit cards off in 4-5 months.  Then focus on building up your savings and start looking for a place to buy. At least where I am the market is slower in the winter meaning you might be able to get better deals.

My rule is to pay off any debt that has an interest rate that I can’t beat post tax with investing. 

Being a new investor, you won’t be beating 15-20% cc debt. Anyone that tells you differently is crazy. Pay it off immediately. 

Don’t be in a rush to purchase an investment immediately. We’re near the end of a very long bull run. Buying opportunities will come. Also buying RE when you are in debt and don’t have reserves is a dangerous place to be. 

Get rid of the debt first.  We all have different risk tolerances.  For me, I would want a strong start in building a portfolio with no credit card (or auto) debt and adequate reserves for the future property in the event things go bad.  

I work in the foreclosure/loss mitigation space and see lots of sad stories everyday from people who didn't take advantage of leverage wisely.

I'm actually quite shocked anybody recommended not paying off credit cards as fast as possible. If that is your idea, I must hear the reasoning. I did have credit card debt for about two decades while I was married. Not a ton, but anywhere between $7-10k at any given moment. I knew it was the wrong thing, but once you're behind, you simply stay behind. But, once you're ahead, man oh man does the money start flowing in and it is so easy to stay ahead. And you CANNOT get ahead and stay ahead while paying 15-25% interest on anything!

My mortgages are 3.75% to 5%. I'll be keeping those. My car is 2.5% (bought used, saved $15k off new). I'll be keeping that. But I will never have credit card debt and interest at the end of a month ever again. An emergency fund is a joke if you're paying 20% credit card interest every month. Having $0 in the bank and $0 credit card debt is way better than $2k emergency fund and $2k credit card debt. 

I know it is incredibly hard to drain that emergency fund. It is not easy to save up that money, especially when  you've never had money before. But you simply have to do it to pay off all credit card debt. 

I'm not a CPA. I'm not a Financial Advisor. But I'm older than a lot, and I've been through more than a lot. And like I tell my kids, don't make the stupid mistakes I made (some of those mistakes financial). 

I agree with @Anthony Wick .  No reserves until the credit card debt is gone.  I adhere to Dave Ramsey's philosophy on my personal finances with the exception of only buying houses with cash...thats just crazy.... just don't understand his mindset on that.  I get its for peace of mind...but thats an expensive price to pay in time

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