Pay off debt or keep emergency fund

[nhfire77]

My wife and I have $11,000 on credit cards from renovating our house we bought, we gained $50000 in equity (appraisal done 07/2009)

I have $6000 in personal debt.

We have enough cash to pay off all of it, but that would leave us with only $2000.00

Do we pay half, or all of it or?

We are attempting to refinance and cash out $11000 to pay off the renovation debt, not the personal debt. Not sure if we can, but we are trying.

Any thoughts?

[jIM_Ohio]

I am a big fan of no cash on hand if debt can be paid off.

There are exceptions to this.

What is your yearly gross income, and what is your monthly and yearly budget?

For example if you spend every penny you earn, then I would NOT suggest removing the debt (right now) until you fixed the problems of other spending.

For example if you save a high amount to retirement accounts (15-20%) then it makes sense to pay off the debt and use other budgeting methods to replenish the savings over a short amount of time (if you can replenish savings within 12 months, its a good move to pay it off).

[JoshuaHeckathorn]

I agree with Jim - if you're living within your means, get rid of the debt. Be aware that some of your credit issuers may close your account or significantly reduce your credit limit as soon as you pay them off.

[Stuartthomas]

i agree jim has cleared the point more clearly ...just follow this..

[Snodog]

Personally if it were me I'de pay it off.

[TheStreetCeo]

For example if you spend every penny you earn, then I would NOT suggest removing the debt (right now) until you fixed the problems of other spending.

Jim, what if using that money to pay off the debt is the fix to the money problem and puts you right side up instead of underwater each month but leaves you with no EF and pay check to paycheck? Then would you spend the money to pay off the debt?

[jIM_Ohio]

Jim, what if using that money to pay off the debt is the fix to the money problem and puts you right side up instead of underwater each month but leaves you with no EF and pay check to paycheck? Then would you spend the money to pay off the debt?

If person spends every penny the earn, and the debt payment is included in that, I might suggest going 50-50

tap the savings to put in a dent
but keep some savings because you are spending way too much


For the situation you portray (the debt is the reason they spend every penny they earn) I am thinking that means the debt is about 20-40% of their income? This would imply lots of free cash flow once debt is paid off, but this does not tell me if they will spend that money (once debt is paid off) or save it.


Its not a numbers thing, its a behavior thing- if the behavior which caused the debt still exists, don't pay off the debt until you change the behavior first.

[TheStreetCeo]

Understood. Behavior would probably be the reason this hypothetical family is in a situation like this. So to answer your question, lets say they have learned there lesson. Now do they use it all of do they stick to the half and half?

[jIM_Ohio]

Understood. Behavior would probably be the reason this hypothetical family is in a situation like this. So to answer your question, lets say they have learned there lesson. Now do they use it all of do they stick to the half and half?

If they learned their lesson, it falls into the other category-
pay it off
then put the debt payment into savings

For example if you save a high amount to retirement accounts (15-20%) then it makes sense to pay off the debt and use other budgeting methods to replenish the savings over a short amount of time (if you can replenish savings within 12 months, its a good move to pay it off).

If savings would be depleted and not replaced within 12 months, then they should not use savings to pay off the debt.

[EconoMutt]

If you think your job is very secure, I'd be tempted to pay off the debt in full.
If there is any doubt about your future employment, I would be leaning toward paying 1/2 and keep the other 1/2 in cash.

I never used to keep cash on hand. I always paid off debt because I was paying out more interest than I received. But, with the new, slow, credit tight economy, I now hold on to my cash.

[jpg7n16]

I would keep 1 month expenses and pay down debt from whatever was excess. Starting with money borrowed from friends/family, then by interest rate.

I doubt you saved up $20k by just scraping by each month. So pay down debt. Finish off high interest debt, then start building the EF back up to a full 3-6mos.

[nhfire77]

.................

[nhfire77]

I earned the money over two years. I started a small business to save more. I have been saving 20% of my gross to retirement for 6 years. My job is ultra secure. My wife's income is less stable, but will always have some employment.

I would be able to put $400-$600 a month away, after paying off the debt, barring an emergency. (I already do $300-$400/month outside the 20% for retirement)

We live within our means. We had to spend the $11,000 on the house to make it livable, it was part of a mortgage clause. It was a foreclosure, the previous owners trashed the place.

The other $6000 is just my own debt I racked up on credit cards. Its on the same account as the majority of the other debts. It was over $20,000, I slowly paid it off, never missed a payment in my life.

My gross income from the two jobs is $70,000. My wife made $40,000, but will make only $30000-$35,000 this year.

Oh about $20,000 of my income is from my small business that I started a few years ago. I already grossed $13,000 this year, but its a tiny business and there is no telling when/if work will dry up, that's where I've been getting my additional $300/month to put away.

I appreciate all your feed back. Any other thoughts on this would be great.

[TheStreetCeo]

It seems like you have a good start. the advice offered here has been good, but I still think the 50/50 approach may be the best if you are not suffering from any "behaviorial problems" regarding money as Dave Ramsey may say.

Like Jim said, if you could pay back your EF within 12 months, their isn't anything wrong with that either.