Save or Pay Off Debt?

[cazio]

So my current situation is that after all of my monthly expenses, I have around $1,300 per month to either put into my loans or save for my savings goals. Right now I have ~$12,500 left in my student loans, with my current plan being to get this to under $10k by the end of this month thanks to an extra pay week in March, and a lot of overtime pay.

It's been mentioned a few times that my loan interest is low enough that I don't need to make paying off my loans a priority, and my safety net should be bigger.

Here's the rundown:

Loans:
Loan A - $5,419 @ 3.86% interest
Loan B - $1,499  @ 4.66%
Loan C- $3,608 @ 4.29 %
Loan D - $2,036 @ 4.29%

Savings Goals:
$2,000 - Safety Net
$3,000 - Final Semester of College (Fall '18)
$4,000 - Payments for the rest of car lease (in case i'm unemployed in college)
$5,000 - Money for a Used Car (not very important, won't be until 2019)

Current Safety Net: $450 in savings account, $700ish in Betterment Safety Net


My thought is to get rid of the 4.66% loan, and go from there, but I'm having trouble justifying if it's worth it to start saving right now. Personally I feel like I should get rid of the debt because I don't want that interest to keep working against me, but at the same time, there are major expenses that are coming up in the next 15 months or so (current job is over, going back to school etc).

 I kind of see it as a tossup, and in my mind I'd rather make sure my money is going toward something rather than leaving the possibility for me to spend it on stupid things. But I also don't know if that's the smartest move.

Thoughts?

[Bracken_Joy]

Start saving right now. Paying off a sub-5% loan when you don't have a big enough safety net is INSANE. Liquidity is the priority. There's  a reason Dave Ramsey's first baby step is an emergency fund!

The best guide I've found for what steps you should take in what order: http://forum.mrmoneymustache.com/investor-alley/investment-order-65299/msg1333153/#msg1333153

[Mother Fussbudget]

Start saving right now. Paying off a sub-5% loan when you don't have a big enough safety net is INSANE. Liquidity is the priority. There's  a reason Dave Ramsey's first baby step is an emergency fund!

The best guide I've found for what steps you should take in what order: http://forum.mrmoneymustache.com/investor-alley/investment-order-65299/msg1333153/#msg1333153

+1.  Exactly this.  Live beneath your means. Save the difference.  Set aside your EF FIRST.  Then the other steps in the "Investment Order".  Welcome to the road to FI!

[cazio]

Point taken! I'll save it instead. Thank you both!

My next question: I know who I am as a person, and if I see a bunch of money in my account, I will make dumb choices. I'm not a shopaholic to anything, but it's easy to justify small spends because I have a huge savings buffer.

Should I keep it in my bank savings account or put it in my Betterment Safety net? I was thinking having about $1,500 in my savings account and sticking the rest in the safety net, but I'm not sure if that's a good idea for money I need to have available. I think $1,500 would cover any emergencies, and the rest I wouldn't need to tap into for at least 10-12 months.

[Raenia]

Definitely save something for your emergency fund first, as everyone else has said.

If you're concerned that carrying a large balance in your savings account will be hard for you to resist spending it, consider opening a new savings account at a different bank.  That way you won't be looking at that account balance all the time, so you can't convince yourself that it's there to be spent.  Out of sight out of mind, basically, but it's still immediately accessible if you need it.

I personally prefer to have my EF in a bank account, so it's available to access immediately if something were to happen, but there are certainly others who will advocate investing at least part of your EF so you're not losing out to inflation.  I'm more conservative and willing to take that hit for my peace of mind.   YMMV

[Bracken_Joy]

Point taken! I'll save it instead. Thank you both!

My next question: I know who I am as a person, and if I see a bunch of money in my account, I will make dumb choices. I'm not a shopaholic to anything, but it's easy to justify small spends because I have a huge savings buffer.

Should I keep it in my bank savings account or put it in my Betterment Safety net? I was thinking having about $1,500 in my savings account and sticking the rest in the safety net, but I'm not sure if that's a good idea for money I need to have available. I think $1,500 would cover any emergencies, and the rest I wouldn't need to tap into for at least 10-12 months.

I'm not sure exactly how liquid a 'safety net' is? But I can give you some general considerations for how large your e-fund needs to be.

-How secure is your job? Less secure, or no unemployment elegeibility, mean you need a large e-fund.
-What is your method of transport? If your car is on its last legs, it's important to have a sink fund.
-Are you healthy? Do you participate in risky activities? If you have any chronic health problems or participate in action sports, a larger e fund is need.
-Do you have dependents? What about pets? Larger e fund for either of these.
-Do you own a home? Any repairs in the foreseeable future? Live in an area with common natural disasters (ie, tornado alley)? Bigger e fund if so.
-How many earners? If you have a spouse or partner who would support you if you lost a job, you can do a smaller e fund. But if you're in the same industry, this doesn't hold.

So what is meant by "small" vs "large" e fund? Usually it's in terms of months of living expenses. If you're single, rent, have a stable 9-5 in a recession proof industry, and take public transit? You could get away with as little as 1-2 months living expenses. But as you can see, a LOT of factors increase the 'smart' fund size. But the largest I think anyone would recommend is 12 months- ie, you have a sick kid and a SAHM and work construction. Most people fall into the 3-6 months living expenses range.

Here is an article about where you should keep your e fund:
http://www.thesimpledollar.com/where-should-i-keep-my-emergency-fund-and-why/
https://investor.vanguard.com/emergency-fund/where-to-put-emergency-fund

[PJ]

The pay down low interest debt versus saving it is a pretty easy question if you're planning to save for the long term.  In other words, the interest you'll pay on the debt will be outweighed by compound interest earned by the time you retire.

But your original post seems to imply that you will likely be spending that saved money in the relatively near future:

...snip

My thought is to get rid of the 4.66% loan, and go from there, but I'm having trouble justifying if it's worth it to start saving right now. Personally I feel like I should get rid of the debt because I don't want that interest to keep working against me, but at the same time, there are major expenses that are coming up in the next 15 months or so (current job is over, going back to school etc).

I kind of see it as a tossup, and in my mind I'd rather make sure my money is going toward something rather than leaving the possibility for me to spend it on stupid things. But I also don't know if that's the smartest move.

Thoughts?

I think that makes the question a bit more nuanced.  What happens to the debt when you go back to school?  Are they student loans that will go into forbearance?  Or will you run into cash flow problems then, to keep up with the payments?  Especially if, as you say, it's possible that you would be unemployed while in college.  If so, then using your current cash flow and discipline now to get at least some of the loans paid off might be a good idea. 

On the issue of liquidity, I like the idea of an account at a different financial institution.  You could also, in a journal or verbally with a friend or whatever way would help you solidify your thoughts, define for yourself what exactly that emergency fund is for.  Car repairs?  Medical care?  Flying home due to a death in the family?  At some institutions, you can give your accounts nicknames - instead of calling it your "emergency fund," call it your "Danger and Devastation Fund" - which should make it harder to spend the money on a new college wardrobe, or the latest iPhone, or whatever you fear might tempt you off your path!

Another option is to look at an investment account specifically designed for short-term - like a Money Market fund, which may give slightly better interest rates than a bank account, but is still easily liquidated.  This works fine if your short-term emergency needs could be covered for a couple of days with a credit card.

[MStangRacer]

with $1300/ month to put to your goals you are talking about 16-17 months (minus saving for a new used car).  So either way it isn't going to be a never ending journey. 

conservatively save up your cash funds first then pay down debt

the only thing that sounds dire is saving for fall tuition, the others are worst case.  So why not split it half and half   

[OvertheRainbow]

You have NO safety net. $450 wouldn't even cover a "small" emergency, let alone a Murphy.

I would pay the minimums on your loans until you have a safety net of at least three to six months of expenses.

[ltt]

I would definitely save first in your case.  The reason being is you want $3,000 for your final semester of college (Fall 2018).  What will happen if you don't have that saved?---my guess is you will take out another loan.  Save first in your case--you will be well into your savings goal by the end of this year if you put $1,300 away per month.  If your job is going away in 15 months, you should have the cash built up to live on.

[cazio]

Thank you for all of the input!

Right now I'm freelance in the film industry, and when this job ends next year around this time, I want to be ready. I guess I'm still just afraid of making purchases because I have a large safety net, and though I know it's there for liquidity purposes, it's just kind of making me nervous that it won't really be doing anything for me in the sense that it won't be gaining interest.

For instance, when I pay my loans I know it's beneficial because it's preventing interest from accumulating and I get to see my debt go down, which is rewarding for me. I know that the interest rate is marginal in comparison to other types of loans, but I've still paid over $1,500 in interest throughout the past four years, which it still a lot for me--and that was me paying off accruing interest during school.

What happens to the debt when you go back to school?  Are they student loans that will go into forbearance?  Or will you run into cash flow problems then, to keep up with the payments?  Especially if, as you say, it's possible that you would be unemployed while in college.  If so, then using your current cash flow and discipline now to get at least some of the loans paid off might be a good idea. 

Only two of my loans are subsidized, so the others will al be accruing interest no matter what. When I go back to school I'll have about a year of no interest on the other two loans, then it will come back.

It's extremely likely that I'll be employed while in college, but it will be part time and from my records I earned about $800/mo working three part time jobs, but I'm not sure what it will look like when I go back. Fortunately my parents will allow me to live at home rent free while at school, but I still feel that it will shake out with me not having a lot of wiggle room. My car lease payment is $249/mo, minimum loan payment is $120/mo, and then pet expenses and an unpredictable paycheck will probably end up with me not having a lot of wiggle room if I do have a job/jobs.

On the issue of liquidity, I like the idea of an account at a different financial institution.  You could also, in a journal or verbally with a friend or whatever way would help you solidify your thoughts, define for yourself what exactly that emergency fund is for.

I like this plan! I really do have a lot I need to be prepared for, and I kinda feel like an idiot for waiting this long to get my butt in gear. I'm only at my current job because I had a hefty safety net that I almost totally depleted due to a move 600 miles from home.

Looking at Bracken_Joy's questions, I feel like I should probably have a Safety net of around $4,000 (in case of unemployment etc), Pet Emergency Fund of $1,000 (lizards typically don't have much beyond a $150 vet visit - knock on wood!!) and then college tuition savings ($3,000) and the rest of my car lease ($4,000), and $1500 in case I need to break my lease in an emergency.

So in total: $13,500ish total (which is pretty much the amount I have left on my loans!)

That seems like too big of a net, but makes sense when I look at the ways it's split up. With that big of a safety net, should I look at investing at least part of it? For example, anything I save for a used car wouldn't be used until 2019, college tuition wouldn't be until August of 2018.

For my savings account, I was looking at Discover, with a .95% yield (my current bank has I believe .03% LOL). Any thoughts on what bank to use? Or would a Credit Union be a better choice in this case?

[Bracken_Joy]

Glad to see you working through all this!

One thought had occurred to me: a bonus to student loans, IF they are federal, is that you're entitled to forbearance and deferment and IBR and PAYE. Basically, you have a safety net built in there- if you lose your job or aren't earning much, you can have your payments reduced or eliminated for a while. That's huge. So if you let them ride, and have an e-fund, you're a LOT safer than no debt but no cash. Make sense?

As for the "where" for the money: sadly, any goal under ~5 years you generally want liquid, NOT invested. There are a couple options here. CDs don't get nearly the rates they used to, but are still better than a lot of places. There are also high interest savings accounts- just make sure they're FDIC insured. Here's NerdWallet's opinions: https://www.nerdwallet.com/blog/banking/best-high-yield-online-savings-accounts/ and Simple Dollar's: http://www.thesimpledollar.com/best-high-interest-savings-accounts/ Just be sure you read the fine print, lots of them require things like setting up auto-deposit or a certain number of transactions per month, that sort of thing.

Final thing: YES, by having these loans you are losing some in interest. And you should definitely try to ensure that, when they're in deferment, you pay off any interest before it capitalizes into the principal. But you have to look at what you're 'buying' with that interest. Security, for one, with an emergency fund. And the time value of money- being able to go to school NOW, not LATER after saving for a long time. How does that affect your work trajectory? How much of a return will you get on having an education? Anyway, don't look at the interest as money lost. Identify what it's buying you instead, and make sure it's worth it. =)

[Tyson]

Agreed with the others - build up an emergency fund first, then pay off the debt, especially since those rates are so low. 

[MStangRacer]

so you have till august 2018 which is 17months with $1300/monthly. This would be my plan of attack :

1st save $2000               1.5 months
2nd Loan B $1500           1.5
3rd Loan D $2000            1.5
4th save $3000 school      2.5
5th save $4000 car lease  3
6th Loan C $3600             3
7th save $5000 next car   4

Then see what the job prospects look like while in school, because all that is left is the biggest loan A. Also if you buy a car for half of what you've saved there's $2500 to throw at loan A

[GizmoTX]

Check out online banks for your savings: they pay at least 1%, are insured, & can be linked to your checking account for transfers (both ways). We like Ally, Synchrony, & CIT.