Author Topic: Saving vs paying off debt  (Read 7402 times)

zaratekid86

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Saving vs paying off debt
« on: July 09, 2014, 10:11:28 AM »
Hey Everyone, I'm am currently in the peach fuzz stage of  my Mustache and have come at a crossroad. I am  putting everything i have extra each month to my debt's. but have only a small amount of $ in the bank account. Should I continue to pay off the debt as quick as I can or save some green for a just in case situation and once i get to about 6 months of living cost saved up then re-focus on paying of debt?

thanks

superone!

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Re: Saving vs paying off debt
« Reply #1 on: July 09, 2014, 10:17:40 AM »
I'm interested what others have to say about this. I think it depends on both how much debt you have (and what kinds with what interest) and also your own job security and risk tolerance.

I have a pretty high risk tolerance, but I'm starting a new job and that always feels a little unstable at first. My plan is to split the difference with putting 1/2 of my expendable income to savings and 1/2 towards paying down my student loans.

matchewed

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Re: Saving vs paying off debt
« Reply #2 on: July 09, 2014, 10:18:24 AM »
Depends on your responsibilities. Do you have people to support? Multiple sources of income? How reliable is your health? You parents health? Your car?

What you're basically asking is the old question of Emergency Fund or Debt? The answer is usually enough of an emergency fund that an emergency doesn't make you dip into more debt.

Cheddar Stacker

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Re: Saving vs paying off debt
« Reply #3 on: July 09, 2014, 10:22:38 AM »
One of the most common questions here. You will get opinions on both sides. However, it's really up to you, and no one can even speak knowledgably about it unless you post your details.

i.e.-Student loan #1, $12K, 6.75%
     -Student loan #2, $18K, 7.75%

It's hard to analyze with out facts, you know.

zaratekid86

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Re: Saving vs paying off debt
« Reply #4 on: July 10, 2014, 08:30:37 AM »
I understand. I started a new job this Jan. and i feel like I will be here a while, but its still new and can't get truly comfortable just yet. I have a side gig where I get an extra $480/month and will turn into $1000/month once I start doing complete Website SEO.  I think I may pick up a shift or 2 at an old pizza parlor that I worked at when I was younger; an easy 70-100$ each 4 hour shift.

my debts are; my mortgage 104k , fafsa- 11k, and car 11k.

 I do have to support my girlfriend till she starts her realty career and our 16 month old Son. I think for the next few months i'll put 60-70% of extra income to saving's and apply the rest to my debt.

thanks guys

nereo

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Re: Saving vs paying off debt
« Reply #5 on: July 10, 2014, 08:39:41 AM »
I understand. I started a new job this Jan. and i feel like I will be here a while, but its still new and can't get truly comfortable just yet. I have a side gig where I get an extra $480/month and will turn into $1000/month once I start doing complete Website SEO.  I think I may pick up a shift or 2 at an old pizza parlor that I worked at when I was younger; an easy 70-100$ each 4 hour shift.

my debts are; my mortgage 104k , fafsa- 11k, and car 11k.

 I do have to support my girlfriend till she starts her realty career and our 16 month old Son. I think for the next few months i'll put 60-70% of extra income to saving's and apply the rest to my debt.
Sounds reasonable.  You've got two people you are supporting right now, and your debt isn't insurmountable.  Personally I'd make sure I had 2-3 months of emergency savings and then do what you are suggesting - putting a % towards savings and the remainder towards debt.  As the savings creeps up you can put more and more towards debt.
What are the interest rates on your debt?

ginklord

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Re: Saving vs paying off debt
« Reply #6 on: July 10, 2014, 08:47:21 AM »
I've always liked Dave Ramsey's recommendation of $1,000 baby emergency fund. It's not a ton of money, but it's enough to knock out the little stuff like car repairs.

Another strategy is to create a cash buffer and eventually live on last month's money. This helps you absorb those little emergencies until you can start saving 3 - 6 months savings.

YNAB (budgeting software) offers some really cool features to help make this happen. My wife and I started using it a year ago, and find that it's incredibly helpful.

Good luck!

Rebecca Stapler

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Re: Saving vs paying off debt
« Reply #7 on: July 10, 2014, 09:31:38 AM »
I approach this issue by balancing the minimum monthly payments and the interest rates, as well.

Think about it this way: You need less emergency fund if you have fewer monthly payments.

How much per month can you commit to savings and debt payoff?
What are your monthly expenses?
What are the minimum monthly payments and interest rates on your debts?
Do you have access to credit cards and / or a HELOC? -- you can use those in a true emergency, instead of having actual cash in the bank.

We have veered off of the path of the robust cash emergency fund and into the state of mine where 99% of true emergencies can be put on a credit card -- and the next month we can probably pay it off. But every penny we put towards our student loans goes to eventually reducing our monthly payments.

But this also has to do with your comfort level. If you feel anxious without having cash in the bank, then you should save enough to relieve that anxiety. Me? I feel anxious accruing daily interest on our student loans -- so that's where we put our extra cash (when we have it).

Jack

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Re: Saving vs paying off debt
« Reply #8 on: July 10, 2014, 02:52:11 PM »
Depends on your responsibilities. Do you have people to support? Multiple sources of income? How reliable is your health? You parents health? Your car?

What you're basically asking is the old question of Emergency Fund or Debt? The answer is usually enough of an emergency fund that an emergency doesn't make you dip into more debt.

I would say the answer is that you should have enough of an emergency fund that an emergency doesn't make you dip into worse debt, not necessarily "more" debt.

For example, if you have $10,000 in student loan debt at 5% and an emergency would require you to put the expense on a credit card at 20%, then yeah, you should have an emergency fund to cover that.

On the other hand, if you have $10,000 in credit card debt at 20%, then you should pay it down and skip the emergency fund because even if you had an emergency and the balance went back up again, you still saved money on interest compared to carrying the high balance while holding cash.

On the third hand, if you were at the 5% student loan scenario but had a 6% HELOC you could tap in an emergency instead of a 20% credit card, maybe you'd be better off neither holding cash nor paying down the debt, but shoveling extra cash into investments instead.

Buttercup

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Re: Saving vs paying off debt
« Reply #9 on: July 10, 2014, 06:08:37 PM »
I agree with some others that it depends on your risk tolerance. I'll let you know what I do, but do realize that I do not have to support my fiance and we don't have any children.

I pay about $1000 per month on average ($850 min per month) to my student loans and save about $200 per month for an emergency fund. I have about $4500 in my EF at this point. I would like to be able to save about 6 months income in my EF because I am a government contractor, so our jobs could be very dependent upon the fiscal budgets and I don't want to die and leave all my debt to my mother (who is my cosigner). I think paying my debt down is more important to me than saving more in my EF though, so that's why if I have extra money come in it goes right to my debt.

labrat

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Re: Saving vs paying off debt
« Reply #10 on: July 10, 2014, 07:12:30 PM »
Your plan sounds similar to we did.  My husband and I only have student loan debt (mostly at 2.5%, a small bit at 6.5%) at this point, and have been saving for an EF and house downpayment.  We put 1/3 discretionary income towards the loans (which was ~150 more than the minimum payments per month) and 2/3 towards the EF/house funds evenly split. When we found out we were having a kid, we stopped saving for the house and shoveled 2/3 into the EF.  Now that baby arrived almost 2/3 is going into the house fund and 5% is going into a 529.  Once house fund is at the desired level in a few months, 25% will go to the 529 and 75% of our discretionary income will go to knock out the loans and we'll be debt free about a year from then.

We personally were comfortable having a year's worth of living expenses saved up/liquid before our baby arrived. I realize that's probably overkill for a lot of people here but with a kid (and my job instability) we just weren't willing to take any huge risks.  We also went into ultra-MMM mode to increase our savings rate over the past year to >50% which had the nice effect of decreasing the EF we would need.

Do whatever you are comfortable with - any way you slice it you'll be making progress!

zaratekid86

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Re: Saving vs paying off debt
« Reply #11 on: July 23, 2014, 07:52:54 AM »
Awesome advance everyone. I think i will save up another 2-3 months of living costs and then put all my extra income towards my debt. If I do that I should be able to pay off my car and FA within 14 months. We have also been torn between selling our house in the next year or 2. When we first purchased the home about 2 years ago it was valued at 144k, we currently owe 106k, but the value based on similar homes in the neighborhood is currently at 168k+/-. I think it will go up to about 175k in the next 9-12 months since the market here is going nuts. 

o my FA  interest ranges from 4.0-5.6%

thanks yall

Cheddar Stacker

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Re: Saving vs paying off debt
« Reply #12 on: July 23, 2014, 08:20:35 AM »
Sounds like a good plan zaratekid86. I would take a conservative approach in your situation as well for at least a year. After that I could go either way with debt reduction or savings. There really is no perfect answer.

Just as a follow up, I started this thread earlier this week and there is a lot of good discussion about this exact subject.