How best to use recently won prize money?

ollyoxenfreeollyoxenfree Posts: 20Member
edited November 2012 in Personal Finance
Hi all YNAB'ers,

I am a fairly new YNAB'er, and I have a good deal of credit card debt. I recently won a decent amount of money, and I want to put $5,000 of it into debt, and want to know best how to use it. The debt I have is:

CC #1 Balance= $6,000, Interest rate = 13.0%
CC #2 Balance = $3,000, Interest rate is split, with a large majority of it being a balance transfer from a 28% card:
Balance = 2,100, interest rate = 7.99%
Balance = 890, interest rate = 18.0%

As I understand it, if I throw X dollars at the card with the balance transfer, it will apply first to the lower interest rate money and not the higher interest rate, so if I throw, say, 2000 at it, the higher interest ~890$ will remain.

So, experts, if you were me, with about $5,000 in disposable income to spend any way you choose on debt and the debt above... how would you do it? Thanks in advance!!!
Post edited by Unknown User on

Comments

  • bradbrad Posts: 2,981Member
    It's been more than a decade since I carried any credit card debt so my memory is hazy, but if I remember correctly the lower rates on your balance transfer have an expiration date, right? And after that expiration date, the rates will rise, possibly by a lot.

    So if it wee me, I'd pay off the entire balance of CC#2 and apply the remaining $2,000 to CC#1.
  • JR5445JR5445 Posts: 99Member
    I would definitely pay off CC#2 and then apply the rest to CC#1. Then you can use the snowball method by taking that monthly payment you used to send to #2 and tack it on the #1 payment.
  • heathlerheathler Posts: 260Member
    I concur...get rid of CC #2 alltogether, and eliminate the risk of a rate change that brad mentions, plus have the snowball strategy working for you as JR5445 mentions. Either way, paying off $5000 worth of debt will save you at least $49 in interest every month, which will bring you that much closer to getting rid of all of it. The difference in monthly intererest cost (first month post payment) between paying off CC #2/$2000 to CC1 or just throwing $5K at CC1 is only about $5.
  • ollyoxenfreeollyoxenfree Posts: 20Member
    Thanks everyone, I appreciate the response and it makes sense. I'll do that today.

    CC #2 is the card I use for gas rewards, but I am considering switching just to cash and keeping that card in the block of ice, where it has resided for the last couple of weeks.

    These things are so insidious... Thanks again all!
  • bradbrad Posts: 2,981Member
    Yeah, that's the thing with rewards cards: if you carry a balance on them, you're paying way more in interest than you'll receive in rewards. I would only use a rewards card if I could be absolutely certain that I would pay it off in full every month. Typically if you carry a balance for even one or two months, the interest you'll pay would eliminate all the benefits you've earned from rewards that year. That in fact is how credit card companies make back most of their money from rewards cards.
  • ollyoxenfreeollyoxenfree Posts: 20Member
    brad wrote:
    Yeah, that's the thing with rewards cards: if you carry a balance on them, you're paying way more in interest than you'll receive in rewards. I would only use a rewards card if I could be absolutely certain that I would pay it off in full every month. Typically if you carry a balance for even one or two months, the interest you'll pay would eliminate all the benefits you've earned from rewards that year. That in fact is how credit card companies make back most of their money from rewards cards.

    I totally believe that, and having been sucked into the deep, dark hole that is credit, I am completely sick of it. My wife and I both have good jobs, have eliminated our student loan debt, car notes, and are working on a mortgage fund (6 months income in reserve) before we leap off the cliff that is home ownership, but credit ALWAYS creeps back. Part of it is my anxiety about using my debit card for purchases at stores - In the bay area here in CA, there are criminal rings dedicated to hacking / replacing the debit terminals even INSIDE stores (Very fascinating how they can do it to terminals INSIDE WalMart...) and so, I use my credit... but then forget to pay it in full at the EOM, or my wife uses it and doesn't tell me, and then the end of the month comes and I can't PIF it.

    Perhaps I should just ice #1 as well.
  • bradbrad Posts: 2,981Member
    We have those criminal rings here in Montréal too. My debit card has been hacked twice in the past 10 years, but my credit card has been hacked four or five times. We now have chip cards up here, and they're becoming more common in the US; those are much harder to hack but still possible. Each time I've been hacked I've never lost any money; the bank closed access immediately and it was just the hassle (not trivial) of having a new account number.

    YNAB can help with your ability to pay a credit card in full every month, but your wife would have to be a full participant in YNAB in order for it to work if you share your credit card.
  • ollyoxenfreeollyoxenfree Posts: 20Member
    brad wrote:
    We have those criminal rings here in Montréal too. My debit card has been hacked twice in the past 10 years, but my credit card has been hacked four or five times. We now have chip cards up here, and they're becoming more common in the US; those are much harder to hack but still possible. Each time I've been hacked I've never lost any money; the bank closed access immediately and it was just the hassle (not trivial) of having a new account number.

    I've never seen a chip card here in the states. I would think that here on the coast we'd have the new stuff before anyone else. I would like to see that though.
    YNAB can help with your ability to pay a credit card in full every month, but your wife would have to be a full participant in YNAB in order for it to work if you share your credit card.

    Unfortunately, she was raised with the "money is for spending, and you can't take it with you when you go" mentality that seems quite prevalent among "millenials", so it's a constant tug of war between her and I on how to budget. Admittedly, I am a complete "newb" with budgeting, and while I don't spend freely as she does, I find it very difficult to budget for things like entertainment and large car repairs.

    For instance, 6 months ago, I took my car in for a routine brake job. Upon inspection, it became apparent that the tires were past their tread life and I needed new tires, too, so in addition to the 600 bucks for brakes, it also needed 900 for tires. Naturally, pre-YNAB, I just threw it onto my CC and said to myself that I'd pay it off over time... Never happened, of course. I am still not sure how YNAB could have helped me stay on budget there.

    I am trying hard to live by YNAB, but I find myself going "over budget" constantly. If we only have $4 left in our entertainment budget and some of our friends invite us to a movie, we go, and then end up over. And so on. I am sticking with YNAB, and even purchased it to keep going with it, but I just can't see how it's helping me much. (Except the forum, which is a huge help).
  • bradbrad Posts: 2,981Member
    I am trying hard to live by YNAB, but I find myself going "over budget" constantly. If we only have $4 left in our entertainment budget and some of our friends invite us to a movie, we go, and then end up over.

    It's okay to go over budget: I routinely go overbudget on many of my categories, but I don't let them stay that way. I don't view my category allocations as "allowances," but rather as guides, and while I try to stay under them YNAB is designed to let you be flexible. If I go over in a category, I simply take money out of one of my other categories so the overspent category goes back to zero. The process of deciding which categories to borrow from lets you see the consequences of your spending decisions and it can be a motivator for staying closer to your budget.

    For example, when I go over on something I always pull the money out of one of the "wants" that I'm saving for: a new computer, new car, new lens for my camera, that sort of thing. It means I have to wait that much longer to save up enough money to get those things, which is aggravating, and that helps me stay close to my original spending plan.

    Of course sometimes big expenses come up that you can't cover with your current month's budget and you have to pay for those over time with a credit card. I know there's a way for YNAB to handle that, but I haven't learned how because I never let that happen (I have an emergency fund, and to me carrying a credit card balance constitutes an emergency). But I didn't have an emergency fund for most of my life...I know how difficult and frustrating it can be.

    I treat my credit card as if it was a debit card: my transactions go immediately into YNAB and count against my budget for this month. That way I can never spend more than I have available.
  • heathlerheathler Posts: 260Member
    Agree with brad...I also have several categories each month where I typically go over and have to figure out what has to wait since I did that. Sometimes they don't bother me at all (my husband was so excited to go to a special exhibition sporting event that's coming to town that I found 4 categories to steal from to fund it). Sometimes I get mad at myself for going over on eating out just because I was too lazy to cook. Which then makes me think just a little harder about it the next time that happens. This month I've actually been VERY good about eating food at home instead of picking something up because I want to save the budget money for the vacation coming up. So there may still be some baby steps in your awareness or priorities that you may not even have noticed...
  • bradbrad Posts: 2,981Member
    One suggestion would be to take money from your mortgage fund whenever you go over, and especially if your wife overspends. She needs to understand that there are consequences to spending freely, and she has to decide among her priorities. If it's okay with her to delay buying a house for a few more years so she can spend more, that's fine -- she just has to make the decision.

    That's what I like about the YNAB approach: it's not judgemental, it's not "you failed because you went overbudget on this category." Instead it's "life happens, now you have to figure out how to fund this category you overspent on. The money has to come from somewhere." It's financial management for grownups.
  • smallLifesmallLife Posts: 325Member
    I would save a bit for taxes, depending on the type of prize money (and given the amount I'm sure that the IRS knows about it) there is a percentage that is owed come tax time. Other than that I would bulk up some rainy day funds - split 1k around for that, and then pay off the credit cards highest interest rates first.
  • writerlillywriterlilly Posts: 8Member
    Pay off the entire balance of CC 2. It has the higher interest rate. Then pay down $1000 on CC #1 or as your money allows. As long as you have a $1000 window, you should be okay. Shouldn't be hit with minimum payments. Get rid of CC 2 while you can!
  • MacGuyMacGuy Posts: 61Member
    As I understand it, if I throw X dollars at the card with the balance transfer, it will apply first to the lower interest rate money and not the higher interest rate, so if I throw, say, 2000 at it, the higher interest ~890$ will remain.

    Actually, if you are in the states, per the Credit CARD Act of 2009, any payment above the minimum monthly payment MUST be applied to the higher interest rate balance. So I would suggest first paying the minimum payment on CC#2 + $900 (to be sure to account for any accrued interest), then put the rest toward CC#1. This should drop your minimum payment on both cards as well, so (assuming you keep paying the same amount every month) you will be chipping away faster at the principal.
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