# Where do I start



## clangsq (Aug 5, 2012)

Hi all,

This is my first post and I need help deciding where to start. I was very unwise with my finances during school and Im trying to straighten that out. I am a late bloomer - I am in my late 20s. I graduated almost 2 years ago and I am currently employed making around $55k. I pay around $750 monthly for rent. 

This is my snapshot:
debts:
Osap - $26,800
student line of credit - $9400
credit card - $5600 (limit of $6100)

assets:
savings: $17,000
tfsa: $8500

I am currently saving around $800/month. The reason I saved is because I wanted to build a buffer so even if I happen to lose my job, I would still be able to pay off bills. After graduation, I was unemployed for almost 9 months, so I am wary of going through that again. Which should I pay off first after the credit card - Osap or the LOC?

Should I allocate just the $17k to debt repayment, and then just lower how much I save monthly and move that towards the debt, while leaving the tfsa as a sort of emergency savings?

Thanks for the help.


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## mind_business (Sep 24, 2011)

This is what I would do ... coming from a non-financial expert.

1) Kill off the Credit Card debt.
2) Figure out how much 6 months of your bare minimum living expenses are, then add a couple thousand for an emergency car repair.
3) Put amount from item #2 into safe, liquid investment (bank account is fine). This is your starter emergency fund. Over time you can expand on it.
4) If you have any savings left after #3, throw it at your highest remaining interest rate debt.
5) Put all monthly savings into debt payments until they're gone.
6) After all debt is paid off, revise your budget for a bit more fun allowance (ie: trips, etc), and start retirement savings.


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## crazyjackcsa (Aug 8, 2010)

Start at the beginning.

There's no point earning 1% interest so you can pay double digits on the credit card. Get rid of the the credit card debt and the LOC. 
From there, it gets a little fuzzier. You could cash out everything to pay down the OSAP, or you could hang onto a little money.

Don't fool yourself though. As long as the debt outweighs the cash, there is no "buffer". I'd probably save around 5K in the TFSA and take the rest to put against the debt. Then I'd keep your debt repayments the same, and allocate the $800 a month to the OSAP loan as well. 
Rough numbers, but you could be debt free in less than two years. 
At that point start building the emergency fund.


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## mind_business (Sep 24, 2011)

I agree with paying off the 20%+ Credit Card immediately. However the remaining debt is likely at much lower interest rates. Isn't building an emergency fund, waiting until after the debt is paid off in 2 years, the opposite of what an emergency fund is for. It's prioritizing the debt payments higher than your security during those 2 years. What if he/she loses their job in year one? Keeping 5K in the TFSA won't go too far. It's not easy for young people to get jobs these days, typically taking them much longer to get re-employed.

I would say your strategy would be sound if their parents lived in the same city, and if they could move back in when they ran into trouble. Otherwise, I think it's more important to have that emergency fund set aside first, allocating all their other monthly payments towards the debt.

Admittedly, I tend to lean on the conservative side when it comes to life. Paying a bit more in interest payments to me is worth the security of knowing I have an emergency fund set aside for life's curveballs.


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## crazyjackcsa (Aug 8, 2010)

The LOC and OSAP loan could carry an interest rate of around 5%. I don't know, Clang would have to fill us in. As far as the buffer, it depends on how you view things. 

I'm looking at it this way: Clang doesn't actually have an emergency buffer. They might think they do, but the actual cash position sits at -$16,300. 

Right now Clang is probably being charged around $200 a month in interest, and is earning around $30 a month. Saving that money instead of paying the debt costs $2,000 a year. 

So, what's the quickest way into the black? Get rid of the debt and the associated interest cost. At the very least the CC and LOC should be paid off in full. After that, it matters less.


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## Maybe Later (Feb 19, 2011)

I agree with ridding yourself of the CC debt ASAP.

After that, I would pay off the LOC. I can see mind_business' position, but there is no point in carrying these interest costs monthly while earning less in the savings account. In the event of an emergency that cash is still available from the LOC and it hasnt cost you the interest every month. Start rebuilding your emergency fund once those debts are paid. Not ideal, but if you have the discipline to save the $25 K, you likely have the discipline to leave the LOC alone. Do you?

I don't know enough about OSAP loans (rates, terms, tax deductability) to know how to evaluate the pros and cons.

Lots if people in their 20s have negative net worths carrying student debt. Hardly crippling. But the other side of the picture is cash flow, which appears to be positive. Without details we don't know the whole picture (and we don't need to in order to answer the simple question of what to pay first), but by paying those two debts immediately the cash flow is improved right now, which will improve net worth quicker in the long run. In fairly short order the OP can be in their late 20s/early 30s with an education and no debt if he or she chooses. Lots of folks would envy that.

That might be thought of as the immediate triage short term plan. After that, the rehab and longer term plan can be formulated and implemented, but don't pay any more in credit card interest.


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## mind_business (Sep 24, 2011)

It's all about your risk-level. Personally I don't believe in using LOC as an emergency fund. Here's partially why: http://www.gailvazoxlade.com/articles/just_in_case/ways_and_means.html

I get the appeal of paying off debt quickly, but not at the risk of your financial security. 

In my scenario, I would recommend $15K in emergency funds and paying off CC ASAP. This would leave you with $4900 to put towards remaining debt ... bringing the total debt down to $31,300. 

Paying off the Credit Card + $4900 additional debt should free up another $200 per month. This $200 + $800 previous savings per month = $1000 per month that can be applied towards debt payments. The debt would be paid off in approx 3 years ... faster if future salary increases and tax rebates are applied to debt.

Once again, if the OP has the option of relying on mom and dad in the case of emergency, then paying off debt with a smaller emergency fund is a viable option. Not the option I'd want to use though.


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## Young&Ambitious (Aug 11, 2010)

I'm in agreement with CrazyJacks. The OP is already in the red and the fastest way to build wealth here will be to cut out the debt starting with the higher interest ones. Also, try negotiating with the credit company on a payment schedule or interest rate etc or better yet get a loan from a bank/credit union with lower interest and use that money to payoff the credit card.

6 months as an emergency fund is inaccurate as it is a blanket statement that does not work for everyone. Why would a 25 year old student who rents have the same emergency fund as a family of four who own a house? If you check out MoneyGal's posts she often speaks about asking yourself if your job is a bond or a stock ie. is it volatile and you could get fired tomorrow or is your job safe or alternative work easy to find. This in addition to evaluating your dependants, your insurance (or lack thereof), etc etc will be a better way to determine how much you need.


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## clangsq (Aug 5, 2012)

Thanks for all your responses. As stated below, I won't be using the LOC as an emergency fund, since its a student LOC, as soon as I graduated it became closed for use. It was initially around $15k, so I've only paid down around $5k. 

The min payment for the LOC has been around $35 but I pay around $100, and OSAP is $300. I know definitely I should pay the credit card off. Now the interest rates for OSAP are very high as almost half of the payment is for interest. The thing is I get to take advantage of this tax credit during tax time.

By paying off the credit card, I am freeing the $200 a month, and I can direct the rest to debt repayments. I do like the repayment plan as stated above, as since I have the buffer, I can allocate the $1000 to debt repayment. I think seeing the debt constantly decrease will definitely make a difference. I was just overwhelmed with the debt amount, and the fear of not having a buffer and didn't know where to start, so I deferred paying off while just putting the money in savings.




mind_business said:


> It's all about your risk-level. Personally I don't believe in using LOC as an emergency fund. Here's partially why: http://www.gailvazoxlade.com/articles/just_in_case/ways_and_means.html
> 
> I get the appeal of paying off debt quickly, but not at the risk of your financial security.
> 
> ...


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## the-royal-mail (Dec 11, 2009)

Interesting discussion and I agree with crazyjacks once again. With the OP's negative cash position at this point the focus needs to be on eradicating all debt as soon as possible. In the event the sky falls on the OP's head, it is much better to go into that with a cash position of zero instead of -$16,300.

1. pay the debt
2. build up your savings
3. yes, this will take a long time


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## Eclectic12 (Oct 20, 2010)

Young&Ambitious said:


> ... The OP is already in the red and the fastest way to build wealth here will be to cut out the debt starting with the higher interest ones...


True ... but another aspect is to make sure any spending that can be reasonably cut out is. Paying debt off quickly just to replace it won't help either.


Cheers


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## Maybe Later (Feb 19, 2011)

Interesting. 

So the student LOC is no longer a line of credit, but now a personal loan? That does make a difference. Is it tax deductable? Was there an option to convert it to a standard unsecured LOC?

I also find it interesting that this is one of the few threads where personal net worth has come up. I find myself in agreement with a lot of what the last few posters, including TRM, have said.

Now I will put on my flame-retardant suit.

I generally advocate for the most rational or reasonable approach based on the math and total long term costs. You'll note I did not suggest earlier that clangsq dispense with an emergency fund and use the LOC as such indefinitely. Rather, what I suggested (based on the assumption that LOC was indeed still readvanceable when paid) was to pay out $15K (credit card debt and LOC) and _"Start rebuilding your emergency fund once those debts are paid."_ That would have left clangsq with exactly the same net worth, $2K in the savings account and the TFSA untouched, the OSAP loan outstanding, the same access to cash (if needed) but less monthly interest costs. 

This would put the OP in exactly the same position as having an extra $9400 in the savings account, $9400 outstanding on the LOC and have the benefit of paying less in interest every month for nothing, BUT, this makes many folks uncomfortable.

What I find most interesting is that if a poster were to come to CMF and say, 

"Hi. My name is Pat and I have a good job, a positive monthly cash flow, $27 K in student debt which I want to make accelerated payments on, but no consumer debt, $10K in savings and access to a $10K LOC with no balance outstanding"

I would imagine that the general response would be positive, even congratulatory on taking control, and that this individual would be advised to find a balance between paying the student debt and savings.

I propose that no one would say, 

"OMG you don't have $XX,XXX in your emergency fund! You should borrow that immediately from your LOC and then pay down the debt." It would seem ludicrous. 

However, in essence this is what the (fairly common) advice to keep funds in a savings account at the expense of paying down a LOC (or other readvanceable debt) is saying.

_ Now this is where things get a bit toasty_

To the original poster, clangsq, have you contacted your financial institution and sat down with and discussed your credit history and current creditworthiness? _*If it were me *_I would inquire as to the availability of an unsecured LOC if I paid off the current student LOC/personal loan based on my full-time job. I would compare the respective interest rates and see what it would net me each month in interest savings, while still having the same overall net worth, but having it increase at a faster rate. Clearly there is enough financial discipline to establish over $25,000 in savings. And if you are taking this step, are you able to evaluate the pros and cons of what they may have to offer (or elsewhere)?

Then I would ask myself the following questions before agreeing to anything. And the reason why I bolded "*if it were me*" is because of how I would answer them (_in brackets_).

Do I have the disicpline to leave the LOC alone? (_yes_)
Will I continue to save as much cash or emergency savings as I think I require? (_yes_)
Can I sleep at night without $X in my savings account? (_yes_)
Am I comfortable paying more in borrowing costs than I have to inorder to achieve the same ends? (_no_)

The reason I take the time to do this is severalfold. In part to stir debate, but also because I have been in a very similar position, finishing my post-secondary education later than many and have addressed similar questions myself and with my significant other. The steps I outline would also serve to hasten any increase the OP's long term creditworthiness as far as their credit score is concerned by reducing the total amount of outstanding debt and lowering the % of available credit used. Being able to access credit on the most favourable terms may be beneficial in the future.

I apologize to the OP if this is too tangential. Best wishes.

_ASIDE: Yes, I am aware that a LOC can be cancelled or the terms changed. I would counter with the observation that a LOC can also be called while carrying a balance, putting the individual into the same position as if it were cancelled. I also note that the current loan is not a LOC as such, but I would personaly check the terms and conditions of the current student LOC/personal loan as they might impact my choice as to how to manage that debt._


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## MoneyGal (Apr 24, 2009)

Maybe Later said:


> I propose that no one would say,
> 
> "OMG you don't have $XX,XXX in your emergency fund! You should borrow that immediately from your LOC and then pay down the debt." It would seem ludicrous.
> 
> However, in essence this is what the (fairly common) advice to keep funds in a savings account at the expense of paying down a LOC (or other readvanceable debt) is saying.


No flame suit required. The concept of opportunity cost is often underplayed here IMO.


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## Sampson (Apr 3, 2009)

MoneyGal said:


> The concept of opportunity cost is often underplayed here IMO.


+1


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## Cal (Jun 17, 2009)

As per Maybe Laters opinions....I can't see a bank that wouldn't be interested in clangsq having to pay them interest, rather then the other creditors.


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## Butters (Apr 20, 2012)

Use 100% of your savings to pay off highest interest debts first.

Once you get rid of that debt, you will feel so much more free!


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