Debt/Savings question

[skives]

Is there a point or situation where saving money is more important than paying extra on your debt? I'm not saying don't make the payments on your debt I saying just don't use your extra money on the debt. Instead save that money.

[kork13]

Sure. Here's a few:
1) You can make more interest in savings than you pay on your debt (you have a 0% car loan and a 2% savings account). Save the extra debt payments and make some interest off of it.
2) You don't have any savings whatsoever. Build up an emergency fund first, regardless of interest rates, so that if something happens, you haven't sunk all of your cash into a loan, but rather you can pay cash from the EF and prevent going further into debt.
3) You need liquidity or prefer to be more leveraged in a particular area. Because it's on my mind, a rental property could be an example -- you might choose to pay only minimums on a rental's mortgage in order to maintain liquidity so that in the event that you don't have renters, you can still continue to make the mortgage payments.

[skives]

So if I have a decent EF fund I should put all extra money onto my debt?

[JoshuaHeckathorn]

So if I have a decent EF fund I should put all extra money onto my debt?

Yes - if you have an adequate EF and high-interest debt, put all your extra cash towards paying down the highest interest debt first. Once you've killed that one, do a little jig and then move on to the next one until you're debt free.

[kork13]

So if I have a decent EF fund I should put all extra money onto my debt?

Not necessarily, it depends on the big picture of your situation. If you have a low-interest loan (like 3%-4% or something), it could be more advantageous for you to invest it rather than pay down your loan. But if you're paying 8% or more interest, then probably yes -- your best idea is probably to pay down the debt as much as you can.

[snafu]

If you feel your employment/income is in jeopardy, I suggest conserving cash, making required payments.

[Fizgig]

If you feel your employment/income is in jeopardy, I suggest conserving cash, making required payments.

Agreed, and that is exactly what I am doing. Sometimes I think I'm overpreparing, but my job will probably be gone in six months to a year, but I want all the cash in the bank I can possibly muster. I'm in the aerospace field and finding another job in the industry might take a long time.

Not to threadjack, but I'd be curious to know if folks think I'm going overboard.

Monthly expenses (normal and bare bones): $2500 / $2000
Current savings $35,000

Debt:
2nd Mortgage $9500, 6.75%, $180/mo
1st Mortgage $96,000, 5.5%, $580/mo
Student Loan $1100, ~2%, $55/mo

I'm currently putting $1200/mo into my EF. Also I expect ~$20,000 in severance if/when I'm laid off.

So what do people think? Pay off the student loan and 2nd mortgage or keep shoving everything in the bank?

[Cassius King]

When it comes to job uncertainty I would put all my extra cash in my EF. Once you get through the rough patch and things have gotten back to normal, you can use it to pay down debt. But in your situation, nothing beats having a aggressively funded EF.

[kork13]

Fizgig --
Honestly, in the situation you describe and with the debts you're listing, you could easily swing either way. The interest rates aren't killer (even the 6.75% isn't terrible), and to pay off the 2nd mortgage now would wipe out nearly a third of your savings, so it's of questionable advisability. I think you're fine not paying anything off outright, though you might consider making additional principal payments on the 2nd, perhaps just doubling the payment. That would allow you to bring it down faster without draining your savings, nor prevent you from continuing to aggressively build your EF. The EF is currently at about 1yr's expenses as you are, so I'd definitely consider chipping away at the 2nd mortgage.

Skives --
Back to your initial question, Fizgig's situation is another really good one. When you're facing job instability, you want cash on hand, and if you're expecting a job loss, it's often more important to hoard cash to prepare for the lean times than to knock down debt. But every situation is different, so no bit of advice can be generally applied in all scenarios.

[LivingAlmostLarge]

Moving! We're stockpiling cash instead of paying off debt because we're trying to move cross country. So cash is important in case we need cash to sell our home.

[jpg7n16]

1st - get enough cash as a small buffer (DR says $500-1000, I like 1mo expenses)
2nd - pay off all high interest rate debts (7%+)
3rd - get a full 3-6mo EF (3 months is fine, doesn't have to be 6)
4th or 5th- start on the low interest debt (or) invest for retirement

The lower the interest rate on the debt, the more inclined I am to invest for retirement, but all the 1st 3 steps must have been covered before you get to that point.

ie. I have a 2.4% student loan that I am intentionally not paying extra on, in order to rather invest that money for retirement. But if I had a 20% CC, I would stop retirement funding until that was gone.

[jpg7n16]

Not to threadjack, but I'd be curious to know if folks think I'm going overboard.

Monthly expenses (normal and bare bones): $2500 / $2000
Current savings $35,000

Debt:
2nd Mortgage $9500, 6.75%, $180/mo
1st Mortgage $96,000, 5.5%, $580/mo
Student Loan $1100, ~2%, $55/mo

I'm currently putting $1200/mo into my EF. Also I expect ~$20,000 in severance if/when I'm laid off.

So what do people think? Pay off the student loan and 2nd mortgage or keep shoving everything in the bank?

What is your income? 3700/month?

Remember that mortgage interest and student loan interest are both tax deductible in most cases, so the rates on the loans are closer to the following tax adjusted numbers. I don't know if you are Married filing joint, or filing single - so you are either in the 15% or 25% bracket. The higher your taxes, the lower these rates should be:

2nd: 5.0625 - 5.7375%
1st: 4.125 - 4.675%
SL: 1.5 - 1.7%

In your case, going by my typical priorities, I would do the following.

Given those numbers I would only keep 3-6 months (6 being the MAX) in cash/money market. Any amount you have in cash over 6months should be transferred to pay down the debts by interest rate, or transferred into an investment vehicle (stocks, bonds, mutual funds, etc.)

You should have somewhere between $7,500-15,000 held in cash. $10 or 11k would probably be a good amount to have.


I would pay the bare minimum on the Student Loan. And for each dollar I was considering on the top 2 rates, I'd probably take a 50/50 approach. So of each extra dollar for the month, I would pay 50 cents extra on my debt, and 50 cents extra to investments.

Of your $1200, that means once you have 10 or 11k in cash, put $600 extra on the 2nd mortgage and $600 extra into an investment vehicle (preferably a mutual fund held in a ROTH IRA)