what would you do? (re: debt and savings)
OK, so right now I have $3000 in cc debt, $3000 of late estimated taxes (that I haven't paid because I was out of work for two tax periods, oh the irony ::)), a $600 ER bill, and $1000 that I owe a family member who loaned me money. So, $7600 total.
If you were me, would you a) continue putting aside a percentage of your earnings for savings, and chip away at the debt with what's left over, or b) suspend the savings for a few months and use that money to blow through the debt faster? And why?
Re: what would you do? (re: debt and savings)
If you are going to be earning less this year due to being out of work you might be able to skip one estimated payment. I don't know you country...
Have you called the hospital or has it gone to collections?
If I was you I would rid myself of the CC debt first. I would ask your accountant how much you should give the IRS, assuming we are talking about taxes for this year and not previous years. I would pay the family member off, then the ER (unless it has gone to collections). Imo, you are not really saving if you still have all this debt.
Re: what would you do? (re: debt and savings)
all loan interest must be paid with after-tax dollars. Thus paying off a $3000 debt that is sucking 18% annual interest ( = $600 per year with compounding) must be measured against a $3000 investment that provides $600 per year worth of return AFTER TAXES. Given even a 25% combined tax rate for a self-employed dancer, earning $600 after taxes requires $750 in pre-tax income. So in order for any investment to provide a better 'rate of return' than paying off an 18% credit card, that investment would have to have a $750/$3000 or 25% annual gain.
While you can occasionally achieve this sort of investment gain, typical gains are far lower in addition to risking loss of principal. And typical returns on CD's / savings accounts which avoid the risk of loss of principal are lower still.
I basically agree with Shasta that you should first find out where you stand on estimated taxes in light of your reduced recent income. Pay off the tax man first, since interest and penalties can get real expensive real fast - plus you really don't want to provide any reason for the tax man to audit you. Then concentrate on paying down your credit card debt. I would also make a token payment against the ER bill, with the purpose being to convince them to not report to the credit agencies ! Lastly I would pay back the family member (assuming that you're not being charged interest on this $1000 informal loan).
Re: what would you do? (re: debt and savings)
Agreed with Melonie and Shasta!
In general, it's always best to pay off whatever has the highest interest and then worry about saving. For me personally, I put about 80% of any extra money onto my cc's and the remaining 20% into savings.
Re: what would you do? (re: debt and savings)
I'm not a financial guru but I went through a horrible stage for a few years where I basically couldn't afford to live. I used to try to pay off one debt at a time but it didn't really work since I had the dilemma of paying 3 small insignificant debts, or 3/4 of a high interest debt, or one overdue bill that could wait a little longer, whichever way I chose I was faced with the prospect of constant debt collector calls and nasty overdue letters.
I eventually realised that everyone just wants to get their money. Nearly all are happy to negotiate a payment plan because even a small regular amount proves that you are making an effort to do the right thing and are not likely to vanish in a cloud of empty promises. As I simply wasn't earning enough for a few years to cover anything more than the cost of living and was constantly behind financially (because everything that can go wrong does when you are struggling) I found that the best method for me at that time was to get in contact with all of those who I owed money to and make an arrangement to pay a bit off each. I even got government departments and financial institutions to come to the party with payment plans, it took a bit of coaxing and the financial mob took advantage by charging extra fees but *shrugs* I got myself sorted in the end.
It was a pretty sucky and seemingly endless crawl for a few years there to have constant debts hanging over head but it kept the debtors from hassling me too much so that I could focus on getting myself into a position to increase the income and crawl out of the horrid financial hole I was in.
Keep the communication up, most places are reasonable about money problems if you keep them informed and try to make regular payments.
Oops, you're talking about savings so i guess you aren't too bad off. Like everyone said bump off the highest interest debts, maybe get some savings to cover yourself if you get a " sh*t hits the fan" situation.
Re: what would you do? (re: debt and savings)
The penalty for underpayment of quarterly estimated taxes is currently a 6% annualized rate, which is not tax-deductible, and therefore equivalent to a about 8-9% if it were deductible, depending on your marginal federal plus state/local tax rates. For late payment of taxes due 4/15/09 on '08 income, there's an added 0.5%/month late payment penalty, also non-deductible. That jacks up the effective rate to the mid-teens or more, so it's almost definitely not worthwhile. So I think that if you feel you'll definitely be able to come up with whatever '08 taxes come due next 4/15, you're better off paying off high CC debt first. Otherwise make your estimated tax payments first.
Incidentally, for estimated taxes, there's a safe haven of 90% of taxes due for the previous ('07) tax year (100% if you had income over 100K or so), no matter what your '08 income happens to be. Of course you'll still have to pay the full amount due next 4/15. The IRS will also happily accept any money you'd like to "lend" them interest-free, above the estimated tax due, if you feel that's the only way you can be disciplined enough to pay all the tax due by 4/15. Ideally, one would pay the minimum estimated tax due, and earn interest on the balance until next April.
I'm not a tax or other professional, so don't trust anything I've said.
Hope this is helpful.
James