What's the best use for this money? Its only a small amount but can make a big difference to me

Question

Around two years ago, after working and living in France for a year I came back to the UK and was £11,000 in debt due to 2 credit cards and an Apple loan for some computer equipment. On top of that, I bought a £40,000 car on finance, with large monthly repayments over 3 years, although its a lovely car and a head turner, its one of my biggest mistakes, I do not regret it tho because I have learnt the hard way, never will I get a car on finance again. You soon get bored of it when the non affordable monthly payments start rolling out.

Cut forward to the present day and this is my current financial situation barring the car finance which I have a tiny bit under a year left to pay:

Credit Card debt: £1150

Apple loan: £507 (this is a quoted settlement figure)

The credit card debt is 0% until December 2015 (it was a good rate balance transfer). The Apple loan is 19.8%.

I currently live with my mother and have been saving to get my own house, although with paying off debts, this hasn't advanced as much as I would have liked it, it's a start tho:

House savings: £2000

However, I have £0 in my rainy day fund.

This month I got an extra £985; this is due to a tax rebate. I don't want to 'just spent' the money. I want to do something with it that will make a difference to my goal of getting rid of those debts and as you can see this will take a large chunk of the remainder off.

Whats the best way to do it? Pay off the bulk of my credit card, focusing on the remainder of the credit card and Apple loan in the next couple of months, put it in a rainy day fund? Pay off the Apple loan and the rest in my rainy day fund? There are so many options and I'm confused as to what the best option is due to probably over thinking it. But I really didn't want to under think it.

Answer 1

First and foremost, it's about changing habits. It seems like you've learned a painful lesson with the car financing. That's a good start. I'd work on developing the habit of making a budget every month before you spend a penny.

As for this money, I would pay off the Apple loan and put the rest in savings. Then pay off the entire credit card balance the month before the rate increases.

The point of putting the money in savings is not about making the small amount of interest. You need to get in the habit of having money in an emergency fund and paying for unexpected emergencies out of that, not just throwing it on a credit card. Ideally, budget over the next few months to pay off the credit card out of your income, not out of savings.

Answer 2

Its very silly of you to have house savings while you have these debts. Your total (listed) debt is 1657, with a savings of 2000, and a tax refund of 985.

I'd be done with the Apple loan and CC tomorrow. Does that accomplish the goal of making a significant difference in your debt? Yes it does.

This will leave you with 1328. I'd keep 500 or so in an emergency fund, and put the rest to the car. Although 828 will not help much with the car it would probably knock a month off.

Next work like crazy to pay off the car. Get a second job or work overtime. Then save a emergency fund of 3 to 6 months of expenses as if you already owned the house. I would tend to go on the high side as I suspect you are single.

Only then does it makes sense to save for a down payment.

Although it is an American institution, the book The Millionaire Next Door might be helpful for you. Your most powerful wealth building tool is your income. When one handicaps that tool with payments and exorbitant lifestyle choices you greatly reduce your ability to become wealthy.

These amounts are so small, you should just knock them out.