Saving vs. Debt Repayment

[southernsara]

My husband and I are starting an accelerated debt repayment program, with the goal of having everything payed off by March 09. I am currently putting $100 per month into an online saving account at 5.5%. If I put that $100 toward our debt repayment, we can shave two months off of our payment schedule, with a savings of about $120. My thinking is that it would be better to keep contributing to the savings account and have that $1700 plus interest in place as our emergency fund. Anyone have differering or concurring thoughts? Should I be building our emergency fund or paying off our debt a little bit faster?

[disneysteve]

If it would only save you $120 and 2 months time, I'd go with the savings account. I think it is more important to have the EF. That way, if any unexpected expenses arise, you have money set aside and don't have to take on new debt.

[jamai]

i think it better to save, you never know whats when you might need it. $120 isn't that much.

[terry1156]

I am of the opposite view. If you are committed to paying off the debt, it makes more financial sense to use the money to pay it off than to have it in the emergency fund. You can then use your credit cards as the emergency fund on the off chance something happens during those two months since there will be room on them from paying down the debt. That places an extra $120 in your account when everything is paid off. Just my two cents.

[JanH]

I think you need some savings toward unexpected car repairs or whatnot because if you pay down some cards, then have a small emergency, the balances would go back up. That might be discouraging. I've liked having the smaller emergency fund savings for the cars and some plumbing leaks we had fixed. It was a relief. But that is what worked for us. It may not be for everybody.

[savingandinvesting]

Debt Repayment

From a purely financial standpoint, chances are that the rate on the debt is higher than the savings rate (both after tax). That is how banks make money - i.e. take in more on loans than they pay out on the sources of funds like deposits. If this is the case here, it means that every month that you keep the debt and the savings at the same time, you are actually paying more than you are getting on the savings in interest. On that basis, it would make sense to reduce debt - if you are worried about not having an emergency fund, consider reducing size to reduce debt cost, or cutting expenses further to save and repay. There is a logical element and a very personal element. Best Regards.

[Denvergirlie]

I am of mind to have a small emergency fund, yes I earn less interest on it than I pay to other creditors. However, the piece of mind that I have from being in control of my finances is invaluable. Knowing that I do not have to be stressed about a car repair, vet emergency appointment, or whatever without having to add more debt is fantasitc.

It's a journey to become debt free and smarter with one's finacnes, I just made sure I packed my bags per se before I left on this trip. Nothing like thinking like a boy scout and being prepared for the campout.

[anonymous_saver]

If I were you I would keep saving until you have a one month emergency fund. Then after that, I would put your extra $100 towards your highest interest debt.

If you already have more than a one month emergency fund, I would take money out and do a larger one time payment towards your highest interest debt.

[Ima saver]

I would go with the savings account. You need to have 3-6 months expenses in your emergency fund.

[Aleta]

When my husband and I started the journey of getting out of debt, we were advised to set aside a small amount every week even if it was only $5.00 and to do the same with the entertainment fund even if it was only $5.00 a month. You can rent a video for less than that.

The point was to set up a habit of saving something and also having some kind of outlet to keep you from going bonkers.

I understand the concept of most here about paying the debt first, but there are items that you need cash for, one being lunch money for the kids, etc.

Most people's idea of an emergency fund is meeting every expense on their budget. If you have an emergency, you're not going to be buying alot of birthday gifts, vacations, doodads, clothing, or entertaining. Look at your budget and see what would only be paid in an emergency and save for it. That goes without saying that later on you can allocate money separately for car and house maintenance.

Try to reach a true one month's emergency fund a little at a time and use the rest to pay on your debt. That is the best of the two.

[Snodog]

I think you should pay down debt.

I'm of the opinion that if you have credit card debt then you cant afford to have an emergency fund. If an emergency comes up then you can just put it back on the credit card and you are no worse off than when you started.

[PrincessPerky]

Every budget and life is different, but what we did was get an EF of 1K before paying off the CCs, then we paid that off, now we have one month and growing slowly while we pay off the car, prolly go for two before we pay off the house.

When we needed a new washer we were able to take care of it without going back to the CC and that felt great....but financially looking at the numbers we certainly had the credit to spare...it was a whole mind set shift we were looking for, not the bottom line.

[BCHGRL]

I think everyone is different. Yes, an EF fund is important. However, if you are committed to paying off debt than you need to stay focused. I work for the Government and my job is as stable as they come so I would put more towards paying off the debt. However, if I worked in real estate or something that I wouldn't have a guaranteed paycheck OR I might be out of work tomorrow, I would focus more on my EF.

[RetireEarly]

One thing a lot of people seem to forget about is factoring taxes into calculating the cost of saving versus repaying debt. This is very important since a savings account will generally have a high tax rate (as opposed to long term capital gains) and most debt interest people seem to compare savings too is not tax deductible (except mortgages and student loans).

[Aleta]

Like the above poster stated, many things are not factored in the savings and debt equation. Lets see that you have $1,000. in savings and for simplicity, I'll say you receive 5% . At the end of the year you have $50. which is taxable. Even if your taxes get down to the 15% bracket, your tax on the $50. is $7.50, leaving you with $42.50.

Let's say at the same time that you have a debt of the same amount $1,000 that you're paying 18% annually. Your interest will be $180.00. If you were to apply the $42.50 that you actually made from your savings, you'd still be in the hole for $137.50. $180.00 minus 42.50. = $137.50. The interest on the loan you can't claim on your taxes. It may not sound like much, but $137.50 interest on $1,000. owed is a lot.

I know that these figures may not be exact, but you can redo to your own income and tax bracket. It's just something most don't consider. My Mom was doing the same thing. She had the money in the bank to pay off her house and she was totally upside down. She wasn't making enough money and never deducted the interest and yet she was making this interest on her savings and paying the bank over $1200.00 a year for interest on her mortgage. I asked her why she wanted to give them free money. I think back then that she only owed like $15,000. and her same %15,000 was only earning less than 1% at that time.