Save or Pay down debt?

[geojen]

I am looking for some advice. Should I prioritize putting more money in my emergency fund (I would like to have 10,000 in there, and only have 4000) or pay down car loans? I will be getting a 5000 dollar bonus from work in a couple of weeks. 2000 of that money is spoken for (we just bought a house and needed to make some repairs). What should I do with the other 3?

I have 2 car loans--one with a 6900 balance at 6.8% (4.5 years left) and one with an 8000 balance at 5.75% (4 years left).

I'm already saving 200 dollars a month toward the emergency fund, as well as putting aside 40 dollars a week for christmas/vacation this fall.

[Merch]

Just something to think about, if you pay of your debt, your EF would need to be less because you would have less monthly expenses.

So, my vote is to get rid of debt. I have 2 car payments in the interest rates are like 3.99% and 3.9%. I'll be paying both them off this year. It will save me $1,041 a month and my 6 month EF will be $6,246 less because I eliminated that expense. Again, just something to thonk about.

[Slug]

Pay down the 6.8% loan.

[jIM_Ohio]

I would pay down debt before leaving cash in the bank.

3 reasons:
1) earning 6.8% interest in a bank is tough
2) the cash flow from the debt payment will increase EF faster than accrued interest can
3) the EF already has some money in it.

[sweeps]

Save and pay down debt. Why is that never an option?

[Aleta]

I agree on paying down the 6.8 % loan. The above poster is right about your expenses being less when you pay your debt off. You wouldn't need as much money in your emergency fund. Getting rid of your debt eventually puts more money in your bank account. Right now you're getting interest and getting taxed on it. Think about that.

[disneysteve]

I think with rates of 6.8% and 5.75%, you will do better to get rid of debt than to put money in a savings account. Once the cars are paid off, be sure to start setting aside money each month in a car fund so that when the time comes years from now to buy the next cars, you can do so with little if any debt.

[maat55]

Dave Ramsey's plan is:

First be current on existing bills.

Second, save 1,000 EF.

Third, put any extra money toward smallest debt until paid. Then move to the next one.

Fourth, after all debts are paid except house, save 3 to 6 months EF.

Fifth, invest 15% into retirement, fund college plans, save for cars and pay any extra toward house.

[disneysteve]

Originally Posted by maat55

Dave Ramsey's plan is:

put any extra money toward smallest debt until paid. Then move to the next one.

Of course, many of us disagree with Dave Ramsey and instead advise that you pay the highest interest rate debt first and then move to the next highest. That will save you more money and get you debt free faster than his method.

[geojen]

Originally Posted by disneysteve

Of course, many of us disagree with Dave Ramsey and instead advise that you pay the highest interest rate debt first and then move to the next highest. That will save you more money and get you debt free faster than his method.

That's what I thought. I have some school loans as well, totaling about 18,000 dollars, but I thought that if I were going to pay down debt with the money, I should put it toward a debt that the interest isn't tax deductible. Plus, the interest on these loans is lower.

[maat55]

Originally Posted by geojen

That's what I thought. I have some school loans as well, totaling about 18,000 dollars, but I thought that if I were going to pay down debt with the money, I should put it toward a debt that the interest isn't tax deductible. Plus, the interest on these loans is lower.

In general, student loans are usually your last debt to pay because of size.

Of course, many of us disagree with Dave Ramsey and instead advise that you pay the highest interest rate debt first and then move to the next highest. That will save you more money and get you debt free faster than his method.

I agree with you in many cases, but the smallest to largest snowball can be very effective as an motivator. It is designed for those who are radical about paying off debt quickly, limilting the amount of interest paid anyway.

[SpiderPig74]

Definately pay off the loan. As has been mentioned, your monthly outgoings will be less (so that is money you can save), plus the interest you are probably paying on your loan is less than the interest you will be earning in a saving acc.

[SpiderPig74]

Btw. I have to say, even though it may take longer & you end up paying more, I think the snowball method is a great idea - especially for those who are really down about their debts. Sometimes tackling the largest debt can be overfacing & you can end up giving up before the end & this can lead to it's own problems.

[disneysteve]

Originally Posted by maat55

the smallest to largest snowball can be very effective as an motivator.

Originally Posted by SpiderPig74

Btw. I have to say, even though it may take longer & you end up paying more, I think the snowball method is a great idea - especially for those who are really down about their debts.

Exactly. DR's advice is psychological advice, NOT financial advice. The snowball method makes you feel good because you see the number of debts, the number of payments you are making each month, drop more quickly. And there can be value in that for certain people. Just remember that if your goal is to get debt free as quickly as possible and at the lowest cost, go by interest rate, not by debt amount.

If someone needs motivation to pay off their debts, DR's method is good. If you are already motivated, the other way makes more sense.

[prosper]

Originally Posted by disneysteve

Exactly. DR's advice is psychological advice, NOT financial advice. The snowball method makes you feel good because you see the number of debts, the number of payments you are making each month, drop more quickly. And there can be value in that for certain people. Just remember that if your goal is to get debt free as quickly as possible and at the lowest cost, go by interest rate, not by debt amount.

If someone needs motivation to pay off their debts, DR's method is good. If you are already motivated, the other way makes more sense.

I am going to have to humbly disagree with you. I do not think you can consistantly separate the finance advice and psychological advice. They go hand and hand. As a matter of fact, their is a sector of finance called behaviorial finance that deals with this very subject. Sometimes the best advice isn't the best advice.

[disneysteve]

Originally Posted by prosper

I am going to have to humbly disagree with you. I do not think you can consistantly separate the finance advice and psychological advice. They go hand and hand. As a matter of fact, their is a sector of finance called behaviorial finance that deals with this very subject. Sometimes the best advice isn't the best advice.

You aren't disagreeing at all. I totally agree that for some people, the snowball method is best because they need that psychological boost from seeing something actually paid off. It can be frustrating to be making payment after payment and seemingly making no progress because the amount is so large that it doesn't have much impact. It can give you a mental boost, though, to actually pay off a small loan and be done with it.

All I was saying is that if you want to know which method will save you the most money and get the debts paid off the quickest, it is not the debt snowball method.

[Aleta]

Steve: I have to agree with Prosper about the snowball effect. If you are barely making it financially and you're deep in debt; getting rid of a debt quickly is a big boost to you mentally. We were like that. Just having that list and getting rid of one less chore every month was extremely encouraging that we could do it. There are some that are in debt but they can still save some, have a bit of a life, and pay their debt off. But for those that are really struggling, that 1st. bill paid off is important psychologically. I can remember not going to a fast food for 3 months and not eating out at all. I can't imagine having to do that for 2 to 3 years until one bill was paid off. Somtimes the interest saved in that case is not worth it in the long term. I personally, did the snowball effect before I ever heard of Dave Ramsey and it was a big relief to me as I paid off each of the bills.

[anonymous_saver]

Originally Posted by disneysteve

Of course, many of us disagree with Dave Ramsey and instead advise that you pay the highest interest rate debt first and then move to the next highest. That will save you more money and get you debt free faster than his method.

I disagree with Dave Ramsey's plan as well. That being said, I would much rather have people follow his plan, than no plan at all. Saving up $1,000 for an emergency first isn't a horrible idea, but I do think that the only way to go is to pay off the highest interest debt first. Why not pay off your debt faster? Makes sense to me anyways!

[noppenbd]

For me the DR method worked really well. There is a huge psychological benefit each time a loan is completely paid off. It makes the sacrifice have some meaning. I would kick those 2 auto loans to the curb ASAP.

[jIM_Ohio]

DR plan works well to improve cash flow, which is probably why it is so popular. The psychological benefits to better cash flow really do work in some cases.

If a person has cash flow, I would recomend not listening to DR and make money work harder for you than you do for the money.