Tuesday, March 12, 2013

Am I Insane?

So, I've drained my Emergency Fund, and it wasn't for an emergency.

I paid off my Capital One credit card.

Once I'm sure I'm in the clear and no interest is going to be charged, I'm closing off the card.

I've done this for a few reasons:
  1. I feel like I'm so close to the finish line of paying off debt that I can taste it. I am getting super impatient to pay off this debt.
  2. I hate making 2 debt payments every month and only paying off a portion of each one. Now, I only have 1 payment, with a nice snowball from the now gone payment.
  3. I have other resources I can tap if I run into an "emergency" in the short term. Of course, my now #1 priority is to get that EF back up to $1,000 ASAP. Then I will work on increasing it to 3-6 months of expenses.
  4. I'm paying more interest (14.99%) on the credit card than I'm making on my EF (1.4%).
  5. It brings my total debt down from $6,018.86 to $4,153.13. By the end of March, that number will start with a 3.
  6. That means instead of taking until the end of the year with payments at about $600 a month, it can be paid off in November or earlier with payments of about $500/mth. Obviously, I will try and pay it down faster. But this makes the payment more in line with my budget.
  7. I will be closing this card in order to have less debt and less available credit that should help when we're going to be getting a mortgage. These are factors in the GDS and TDS calculations that the banks do when figuring out qualification (and interest rates) for a mortgage.
I wouldn't recommend this strategy for everyone, well, actually, anyone else. I thought long and hard about doing this. If I felt that I would run into some serious issues in the short term (unemployment, illness, etc) then I wouldn't have done it. Granted, life can decide to throw you for a loop at anytime, which is the point of an emergency fund but I don't see it coming right now.

Also, if an emergency does come, I only had $1K in the EF which would hold me for maybe a couple of months. With minimum debt payments of $250 it wouldn't last very long. Now my minimum would be $125 and will be getting less as I continue to pay. Also, its more than likely would have put some expenses on my credit card anyways.

So, now my Debt Repayment Sidebar has been updated and is mostly dark blue. However, my Savings are now mostly light. Once this debt is paid off, saving will be my #1 priority, its just not it right now.

How about you? Do you think I'm insane? Would you drain your savings to pay off debt?

TTFN,
Morgaine
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14 comments:

  1. MichelleMarch 12, 2013 at 10:23 AM

    I don't think you're insane at all. I would have done the same!

    ReplyDelete
  2. save. spend. splurge.March 12, 2013 at 11:00 AM

    I'm paying more interest (14.99%) on the credit card than I'm making on my EF (1.4%).

    This makes so much more sense.

    You get to save the interest in the meantime, especially at 15% interest.

    If you have a real emergency, you might as well just go back on credit card debt in that case instead of keeping $1000 balance on it.

    I only recommend keeping a $1K EF if you have student loans at 5% or something, but credit cards are another ballgame.

    ReplyDelete
  3. Nd.chicMarch 12, 2013 at 11:42 AM

    I don't think you're insane at all. You were paying much more in interest and you did reduce the amount you owe monthly which is very important in an emergency.

    ReplyDelete
  4. MorgaineMarch 12, 2013 at 12:22 PM

    Thanks guys! You made me feel so much better. I have to say that while I thought this was the best decision for me, both financially and emotionally, I was loathed to confess it on the blog. Usually, I post ideas on here to get feedback before I do them to see what others in the pf world think. But since I thought I was going to get a lot of flack for it, I didn't mention it until it was done.

    I've set up this blog as a journal of my personal money journey, I've never made it seem like I was giving advice but I still didn't want to make it seem like I was suggesting that everyone do this. It was a personal choice.

    Also, this was my debt with the highest interest rate (14.99%) the one that has the $4,100 balance is 10.4% with a balance transfer rate of 0% on $3,500 of that balance for another 6 months. My other c/c has an interest rate of 11.5% but I've been paying it off monthly and haven't paid interest since the honeymoon.

    With all the OT I've been doing lately, it shouldn't take too long to get my savings back to a more comfortable level.

    Thanks for your comments, I really appreciate them :)

    ReplyDelete
  5. Angela TolsmaMarch 12, 2013 at 3:51 PM

    hello just came across your blog. that is super exciting that you paid it off and will be closing it down! Just a small word. When you close a credit card it does hit your credit. Just be sure they close it properly so it doesn't negatively affect your credit.

    ReplyDelete
    Replies
    1. MorgaineMarch 13, 2013 at 4:14 PM

      Hi Angela,

      Yes, I'm aware that it will cause a hit to my credit score. But I'm ok with that for 2 reasons. (1) It is my newest form of credit. I've actually had this c/c less than a year so it doesn't have a long and lustrous history. It does have a good payment history, so I'm not closing it when it would be in bad standing. (2) Closing it lowers my overall available credit and while that may or may not hurt my score (I've read a few different opinions on this) it doesn't matter since the bank looks at available credit to determine TDS and that's a major factor in how they decide what interest rate they give.

      I definitely agree that I will check my credit score after the closing and make sure its done properly.

      Thanks for dropping by :)

      Delete
  6. AnonymousMarch 12, 2013 at 5:07 PM

    As long as you know 100% that you do have options if you do encounter an emergency, I'd say it was a good move. Hopefully you can get that last card paid off well before November!

    You've been putting out some great posts lately. Keep up the good work :)

    ReplyDelete
    Replies
    1. MorgaineMarch 13, 2013 at 4:19 PM

      Hi Cassie,

      I'll admit that they aren't the best options in case of an emergency. That's why I'm planning on getting that EF back up to at least $1K ASAP and then continue to build it up for future. I certainly wouldn't recommend this to anyone else, I'm actually a strong advocate for having an EF but since this debt was driving me crazy and $1K wouldn't really save me for very long in case of an emergency, I just had them cancel each other out.

      I hope so too. Another reason for wanting the 1 smaller payment is that besides building the EF back up, I also have 2 weddings to go to this summer (one of which involves travelling to Alberta), we want to purchase bikes, and possibly a house this year, so I still have a lot of saving to do. Having a little more flexibility in my debt repayment should help, but of course, if I get some extra money (like OT) I will certainly move it in debt's direction :)

      Thanks! I've just been posting some of what I've been doing to help me get through the spending ban and how I'm trying to save money and pay off debt. If they help someone else, great, if not, at least I'm working hard towards my goals :)

      Thanks for your comment! :)

      Delete
  7. PinkyMarch 12, 2013 at 9:19 PM

    Sounds like a good plan to me and something I would do!
    Great work!

    ReplyDelete
    Replies
    1. MorgaineMarch 13, 2013 at 4:21 PM

      Hi Pinky,

      Well, like I said, I wouldn't recommend this strategy, its just something I decided to do. We all like to say personal finance is personal, but sometimes we get criticized for doing what others think is a bad idea, hence why I wasn't sure to post this at all. But if you're in a similar situation, just do what you feel is best and will help you sleep at night :)

      Take care,
      Morgaine

      Delete
  8. Winterfell Mixed MediaMarch 13, 2013 at 3:17 AM

    My daughter is called Morgaine, nice to hear another one.

    ReplyDelete
    Replies
    1. MorgaineMarch 13, 2013 at 4:23 PM

      Hi,

      Its not my actual name :( I would love it to be and I'm certainly considering naming my daughter (if I have one) Morgaine so its nice to hear there is another one out there :)

      As I wanted to remain anonymous, I decided to go with the name of my favourite character from myth/literature. My favourite book is Marion Zimmer Bradley's "The Mists of Avalon" and that's where I got the name.

      Thanks for dropping by :)

      Delete
  9. DrewMarch 13, 2013 at 9:40 AM

    i think it's a good plan, as long as you don't accumulate debt back on the card.

    ReplyDelete
    Replies
    1. MorgaineMarch 13, 2013 at 4:27 PM

      Hi Drew,

      Since I'm closing the card its not likely that I will accumulate debt back on this card. Yes, I am concerned that I will rack up my MasterCard again. Actually another reason I paid off this card and want so badly to have it closed is that the last thing I did with this card was a balance transfer from my MasterCard since I had racked it up again. Since this won't be an option after I close the CapitalOne card, its given me more incentive to keep the MasterCard balance to what I can pay off in a month and within budget.

      Yes, I would certainly not recommend this strategy to someone who would keep the card open and possibly just rack the debt back up. Then you are worse off than you were before, just as much (or more debt) and no savings. That is certainly not where I want to be!

      Thanks for the comment!

      Delete

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