The Budget Couple

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Episode 57: CDs, Credit Cards, and PMI O My

Nate and Danielle answer two listener questions. The first deals with credit cards and how to manage them while working with cashflow. The second question looks at how to prioritize your emergency fund while still wanting to focus on paying down other debts.

Show Notes

Listener Question #1:

You talk a lot about doing paying your bills and such with credit cards but did you always? What are you best recommendation for working your through to the stage (pay off credit card to start that) and how do we manage cash flow when relying on our debit card and income that deposited throughout the month. 

Yes, we have always paid the bills that we can pay with our credit card. We really like getting the rewards points and we pay them off fully. There are no surprises on our credit cards and everything that gets put on them is budgeted for. As far as income goes, we pay off our credit cards at the end of each month. Our budget is set each month and accounts for all of the paychecks that we will receive for that month. At the end of the month, we pay everything off. 

Basically we use a credit card to put all of our expenses on throughout the month. Our checking account is where all of our income goes for the month. And at the end of the month, we clear our expenses with the income gathered in our checking account. And because we budget for everything, we know that we can cover our bills and it doesn’t matter when those expenses come in.

Listener Question #2:

I am a new listener of your podcast, so you guys may have touched on this topic before. My husband and I are still working on sticking to a budget, but we are paying off our last bit of consumer debt this month. He has a small emergency savings fund, and I have 3 CDs of varying lengths so I am not tempted to pull from savings. We are two years into a 30 year mortgage, and I currently pay $200 extra towards the principle each month(for the first year I only paid $75 extra). I would like for our next financial goal to be saving 3-6 expenses. However, we also pay $95 in PMI each month(which will fall off after 10 years or once 20% of the principle is paid). Should we put more focus into savings, or work on paying down the mortgage to save on PMI and interest? Our interest rate is 3.85%. 

First, it sounds like you have a good budget and you know where your money is going. That’s an important first step. We would stop putting extra money on the house. Put all extra money towards your emergency fund. While it’s true that you may be losing out on interest and PMI payments, but if you have an unexpected expense, you may not be able to cover it without a full emergency fund.

How we would handle this is to put all extra money and put it into a savings account until our emergency fund is fully established. After that, we would try to put money in a retirement account if you are not doing so already. Once the CDs run their course we would cash them out and put them into the emergency fund if it’s not fully funded or put them on the house if it is.

CDs are a good vehicle to hold on to money, but it’s not savings. Your emergency fund needs to be liquid money, or money that you can get from your bank without fees, waiting periods, or hassle. CDs, in our opinion, are really meant for short-term holding on money that you aren’t sure what to do with. In your case, it’s clear that you have places that you want to put your money, so put it to those places instead. 

If you are using CDs to get better interest rates on your money there are plenty of banks that pay an interest rate close to that of the best CDs. The best CD that I could find was a 2.4% return over 2 years. Our savings account at Capital One is 2%, and our money isn’t tied up at all. There are multiple other banks that have similar or better rates out there right now.

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