Should i pay all my debt

[peterj]

I am trying to save but I had a thought should I get debt free first? I got an excellent tax return. I was out of work 4 months and have already saved 2 thousand. I am thinking I should combine the two get debt free and then start my savings plan next month?

[maat55]

It's good to have a small EF first, then payoff all debts, then build an 3 to 6 month EF, then save and invest.

A good starter EF would be 1k to 3 months expenses, depending on the safety of your income. Those who may loose their job should build a larger EF first.

[FrugalIII]

I agree, you should have a starter EF of say $1k and then pay off debts. Check out the website of Dave Ramsey. He explains a very good plan...

[PetMom]

I would keep with the savings. Having a hefty emergency fund and savings is very important now.

From that ef/savings you are always able to comfortably pay any debt payments and pay them on time (everything now has late pay fees - even utitilities now - and everyone wants to charge interest).

Having a hefty ef keeps you from ever having to use your credit cards for an emergency.

If you paid off your debt and had several unplanned expenses/emergencies then you would go right back into debt, run up several debt payments and be in the hole without any emergency fund/savings.

The only way to stay debt free is to have a strong ef.

A big ef also helps to absorb any jumps in prices for anything that can surprise even a carefully planned budget.

Build up your ef then, of course, start paying down the debt.

[disneysteve]

I agree with the others - starter EF, then pay debt, then increase savings.

an excellent tax return

As for this, an "excellent" tax refund would be $0. I'm assuming that by excellent, you mean big. Remember, a big refund is a bad thing. It means you overpaid in taxes and lent the government your money interest-free all year. Instead of having that money in your pocket to spend, save or pay off debt, you let the IRS hold it for you. So make sure you adjust your withholding so that you don't get such an "excellent" refund in the future.

[peterj]

^ how is it possible to hold that money? In Australia it is impossible. I can only claim back money in July I have no control at all

[disneysteve]

^ how is it possible to hold that money? In Australia it is impossible. I can only claim back money in July I have no control at all

My mistake. I forgot you weren't in the US. I haven't a clue how taxes work in Australia.

In the US, we determine our own withholding rate. I can have more or less taken out of my paycheck. If I get a lot back one year, I can reduce my withholding the next year so I don't pay as much in, resulting in a smaller refund.

[anonymous_saver]

Can you set aside one months worth of an emergency fund and pay off all of your debt? If you can, I would choose this option.

Since you would be able to start saving more towards an EF next month, I don't see it as a huge deal of paying off the debt before you save up a larger emergency fund.

Do you contribute up to your match (at least) in your retirement accounts?

[Justice44]

Re: Should I Pay All of My Debt

It's good to have a small EF first, then payoff all debts, then build an 3 to 6 month EF, then save and invest.

A good starter EF would be 1k to 3 months expenses, depending on the safety of your income. Those who may loose their job should build a larger EF first.

That's good advice.

[Justice44]

Re: Should I Pay All of My Debt

I would keep with the savings. Having a hefty emergency fund and savings is very important now.

From that ef/savings you are always able to comfortably pay any debt payments and pay them on time (everything now has late pay fees - even utitilities now - and everyone wants to charge interest).

Having a hefty ef keeps you from ever having to use your credit cards for an emergency.

Great Point!

A big ef also helps to absorb any jumps in prices for anything that can surprise even a carefully planned budget.

Build up your ef then, of course, start paying down the debt.

I did not think of that. I am glad that you pointed that out.

[junosama]

Always aim to clear debt ASAP. Nothing is worse than debt! Man I hope i become rich cause worrying about money is no way to live life that's for sure!

[buildmybudget]

I agree that if you can afford to pay off your debt and begin saving next month, do that. Especially with cc rates going through the roof right now, every dollar you put in savings that you could put towards your debt is costing you money(cc interest)! So pay off your debt asap because in an emergency you'll probably have to use your credit card anyway.

[johnchase]

Debt Free?

By all means, being debt free is the goal that each of us should be striving to achieve. In addition to that, building up an emergency fund of a minimum of 3 months of expenses is very important. The emergency fund should come first. After than then making a plan and sticking to it for reducing and eliminating your debt should be priority.

[amedvedovski]

I agree with most of you who say that being debt free is great. But it depends what price you pay for this.
If, for example, you have debt with 12% annual interest rate then I would pay off that debt. However, if interest rate is 1% (it is what I have for my auto loan) then maybe it is better to keep this debt and invest money instead.
Please do you math first!

[Justice44]

RE:Should I Pay All My Debt

By all means, being debt free is the goal that each of us should be striving to achieve. In addition to that, building up an emergency fund of a minimum of 3 months of expenses is very important. The emergency fund should come first. After than then making a plan and sticking to it for reducing and eliminating your debt should be priority.

HI John,

I agree with you. However, I was wondering if you know of any situations where incurring debt is ideal?