Another look at savings vs paying down debt

I love getting mail from PDITF readers. It makes me feel like I’m important, even though I’m really not. Well, it’s time we help another Debt Puncher out and share our two cents on his situation. His email says…

I just paid off the first of my 9 (yes…credit+retail) cards. It’s a huge achievement. I’m currently following the high-interest method to keep motivation high. My top priorities are:

*Paying off credit card debt
*Establishing a buffer in checking

Would you apply all your monies to paying credit card debt first or vice versa? Or set-up a plan so both can be achieved albeit at a slower pace. According to my projections, I can reach both these goals within a year.

Well, Mr. Anonymous Reader Guy, if I were you I would stop paying your credit cards, forget about savings, head to Vegas, and bet it all on black. Thanks for stopping by, hope I helped 🙂

Haha, I’m only kidding (unless you’re feeling lucky then GO FOR IT!). I’ll answer your question by sharing a little bit about my journey. As you may already know, I started my PF journey with $28,000 in student loan debt, and just a few hundred dollars to my name. Making the decision to save vs pay down debt is not an easy one. In fact, I wrote this post, this post, and this post about it.

Personally, I hated the idea of not having any liquidity. Dave Ramsey suggests saving up $1,000 in a checking account and throwing all discretionary income at your debt. It’s not bad advice, but it’s not what made me feel comfortable. I totally would have lost sleep knowing I couldn’t even write a check for next months rent if crap hit the fan. You can’t pay rent with a credit card so I needed to have money in the bank.

That said, I would not recommend doing what I did and OVER save. At one point I had $20,000 in the bank,  but only $17,000 in student loans (you can read about it here). If I could go back in time, I would give myself a swift backhand to the face for that one. I totally perverted my enthusiasm for saving and kept that student loan around longer than I should have. I was a very bad Ninja.

So my advice to you is probably going to be the most incredible advice you have ever heard in your entire life. Go get a pen so you can write it down. Ready?

Don’t drink and bike, you might spill your beer.

…Oh wait, that was advice I gave to my alcoholic friend.

What I meant was, you should probably save some predetermined amount ($2K, $5K, or whatever) while making minimum payments on your C.C. But the second, and I mean the second, you’ve accomplished that goal, pay down those CC’s like there’s no tomorrow. It may not make the most financial sense to keep your CC balances a little longer, but if you’re like me it makes a lot of PERSONAL sense. Besides, it sounds like you are gonna knock out both goals pretty quickly anyway, so the difference in interest paid is probably relatively small.

That said, I realize I am only one voice in this PF world, so I’d like to turn the soapbox over to the PDITF readers and see what they would do. How much did you put in savings before attacking your debt? Anyone else out there like me and OVER save? How do you balance financial sense (paying down the CC ASAP) with personal comfort levels (saving up a decent chunk in savings)?

If you have any questions, comments, or just a funny YouTube video you want me to check out, feel free to shoot me an email.

29 thoughts on “Another look at savings vs paying down debt

  1. Over save? Hard to believe but it is true. Totally agree with Ninja on this one, maybe a 3 month emergency fund should be sufficient. Although, I’m kind of unconventional because I consider credit cards financial tools that can act as an emergency fund also. However, only the truly disciplined can really say that.

  2. When I was paying off my credit cards, I was also trying to build an emergency fund at the same time. For me, it made sense to do both – I couldn’t stand the thought of ignoring my debt, but I also couldn’t stand the thought of getting a flat tire and having to use a credit card again because I had no savings.

    I added up all my bills each month (including CC minimums) and figured out how much I had left over to dedicate to debt/savings. Then I split that in two – half to my savings account and half paid extra on the first CC I was paying off. I snowballed my credit card debt while maintaining the original amount going into savings each payday. I hit $1000 really quickly, which made me feel better, but I wanted to keep it going and still make progress toward debt. Your mileage may vary, but it worked very well for me and kept me from feeling like I was neglecting one or the other.

  3. My wife and I saved $10k in our emergency fund – this is not touched. We did this by only putting the minimum on our mortgages and being frugal. I always go online and print off restraunt coupons if we eat out. We never order drinks out. Well occasionally my wife gets a Diet Coke now. My car has

    We started with $56,000 in student loan debt and are now down to $20,000 in 1.5 years. Along the way I have been contributing 5% to my 403(B) to get my companis free 5% match and my wife is a teacher so she has some state plan.

    It seems that anyone can do anything for a year or two. I encourage you to take the steps now to ensure a much better financially stable life later!

  4. First off you need to get your priorities straight. What in the world are you buying at these retail stores! You OBVIOUSLY have a shopping problem. That is at the core of your dillema. Do you just love new things, are you not satisfied with your self? Perhaps it is on the necessities of food, clothing, etc for your family?

    My wife and I saved $10k in our emergency fund – this is not touched. We did this by only putting the minimum on our mortgages and being frugal. I always go online and print off restraunt coupons if we eat out. We never order drinks out. Well occasionally my wife gets a Diet Coke now. We drive used cars. We don’t have fancy smart phones. We don’t pay for TV.

    We started with $56,000 in student loan debt and are now down to $20,000 in 1.5 years. Along the way I have been contributing 5% to my 403(B) to get my companis 5% match (free money!).

    It seems that anyone can do anything for a year or two. I encourage you to take the steps now to ensure a much better financially stable life later! Examine your spending habits. Set aside $100 each month for YOU money. Once you blow that on some pair of jeans or fancy bottle of wine stop spending (yourself into debt).

      • Yes, obviously we know enough about the emailer to infer all these conclusions and then smugly make these self-satisfied accusations. And why does Drewman still have $20K in student loan debt? Why are you still eating out? Why doesn’t your wife give up Diet Cokes? Wimp!

        To answer the original emailer’s question: if you can accomplish both goals within a year (paying off CC and building some savings), it may be a moot point how you do it. But the argument for paying off the cards first would be that interest rates are usually off the chart. And the argument for first putting some money into savings is that you need some cushion for emergencies. If you have a stable job and can put away 2-3 months of expenses in savings, I think you’ll be OK for the immediate future. And stop buying those Diet Cokes!

    • out for valentines dinner tonight. wife bought a diet coke. i didn’t say anything 🙂
      We typically have date night every Friday night but will skip it this week since we ate out tonight. That diet coke cost $2.57. If we eat out once a week that’s $133/year. Easily worth keeping my wife happy. (only time she has pop)…

      What’s your excuse?!

  5. I pretty much stuck to Dave Ramsey’s advice of the $1000 emergency fund while I paid off my student loan and car. I also really re-prioritized what I spent my money on and became much more frugal. But I also was fortunate that I wasn’t living paycheck to paycheck, so if there had been an emergency requiring more than $1000 I could have used those dollars to help. I also wasn’t worried about losing my job. After I paid off all non-mortgage debt, I saved 6 months expenses which I still keep. I save $X per month and pay down my mortgage 2x per year with anything over and above the 6 month cushion from savings.

  6. My husband and I felt very secure in our jobs and so we saved a small emergency fund (one months expenses), hit the debt hard, and then got all of our savings goals sorted out. If you read my blog you’ll know that then we got more debt, paid it off, got more debt, paid it off, got more debt, paid it off….and are now..again, are working on building up our savings.

  7. Hmm I think it all depends on how comfortable you feel. If your job is not stable, then I would be all for saving and paying off debt at the same time. But if you have an emergency fund and your interest rates on your debts are high, then pay them off!

  8. We are actually guilty of over saving. We have a 3K car loan left, and $20K in our savings account. I should really just pay it off, but I can’t will myself to lose $3K off my savings account. It’s so demoralizing!!!

    I think I’m going to apply part of our tax refund to paying off the car loan.

  9. You can pay your rent with a Credit Card, it just comes with high fees or some finacial trickery that I wouldn’t recommend doing. The math says you should pay your credit cards before saving and I totally get that but I think saving some will help you sleep better at night and get you in the habit of saving. In the end you are going to need to figure out what makes you feel most comfortable. If it were me, I would probably stash away $500 – $1000 and kill my high interest debt.

  10. I am taking a different approach. I am on a 3 – 4 year debt pay-down timeline ($100k in student loans) and, as of right now, have about $1,000 in liquid savings. I’m throwing every extra dime I have at my student loans. My back up plan if shit hits the fan is to move back in with my parentals and take whatever job I could get. I’m lucky because I have the option of living for free with them (even though it would suck and be super depressing). I’m also that kind of guy that isn’t above working manual labor, fast food restaurants, farm jobs, etc. I will do whatever it takes. Right now I feel really secure in my job but I guess you never know what could happen. Every month that goes by where my debt gets smaller and I still am employed is one month closer to being financially independent. I’m trying to get there as quickly as possible.

  11. I think it’s useful to do a little disaster planning. If everything went south, and we suddenly had no income, what would we have to do to cover our bills? What could you turn off? Cable? Phone? What is the rock bottom amount of money you need per month so you don’t lose the house and car and can still eat? Then ask yourself, how long would it take us to mobilize to cut expenses back to the bone? Are we quick on our feet or do we need to think/talk things through? If you are quick, then maybe you get things together in one month. If you are a thinker – well, think it through. But you better come up with a plan before your emergency!

    The next question is, how much money would we need to live this way for X months, X being the amount of time you expect it would take to get out of your emergency situation, such as job loss.

    Does X amount of money feel like enough? To answer this question, think about how many obligations you have. Do you have kids? Are you young or old? Are you sick or well? Is your house young or old? Is your heating system getting close to the end of its life?

    When we got serious about our debt we had a kid a few years from college, were just 15 years from retirement, and had many aging appliances and house systems. We started with a $1K buffer and couldn’t sleep at night. So we went to $4K, but were still worried. So we did that half and half thing until we got to $8K, but honestly it was frustrating to have 2 projects moving so slowly. So then we spent a few months on savings, a few on debt repayment. Psychologically that worked better for us.

    Then the reality of what college could cost sunk in. Now we pay down debt at a steady but slow rate and are seriously over-saving with the rest. By May we’ll know where our child is heading, and how much that is going to cost. If we need the money for college, good bye debt repayment. But if we don’t need it, we’ll be paying off a big chuck of our HELOC. The prospect of going into more debt for college expenses – well it’s just not possible. We’re too old.

    There’s never enough money to do everything. Your situation will change over time. Have a workable plan for the worst case scenario, then do what makes you happy. That will help you stick to your plan, and to sleep at night.

  12. I started my journey out with $1000 in the bank and then started adding some to savings and some to the debt. I started out with a 50/50 split with 50% of my extra income going to savings and 50% going toward debt reduction. As my savings account grow to where I wanted it to be, I switched it and put 90% toward debt reduction and 10% toward savings. I didn’t want to get out of debt with no savings. Any extra money that I wasn’t expecting always went to debt reduction 100%!

  13. I would save money equivalent to 3 months worth of expenses while paying the minimum on all those cards and then I would attack the cards. Liquidity is important.

  14. We are paying down 150k in student loans. I feel comfortable with a 2k emergency fund. Enough to pay for moving expenses and deposits at the end of our lease.

    However we do also put aside 120 for auto repair expenses monthly which rolls over month to month. So car bills won’t be taken out of emergency fund. And they shouldn’t! Because you should expect to put money in your car.

    We also count next months rent out of this months income to give us a bigger buffer.

  15. We had the exact same question and the answer and our logic came out here http://www.marriageindebt.com/?p=108 With that said (and shamelessly plugged) we have decided that $2K in savings is the first step and then go crazy on paying down the debt. Hopefully our sale of our current living room set on craigslist will get us $600 closer to that goal.

  16. I would go a little higher than $1000. When I was first paying off my student loans, I had cheap rent and a stable job. My teeth weren’t as structurally sound though. Found out I needed an emergency implant for $5500. I had $1000 in the bank at the time (I thought I was young and didn’t need savings but figured $1k is better than nothing). The bill for the first part of the procedure left me with $0 in the bank and $2000 in credit card debt, and I spent a good part of the rest of the year saving the remaining $2500 before going back to loans. That was a big mistake. You never know what will happen even if you are young, otherwise healthy, and live cheaply when you are still paying off debt.

  17. We’re still paying down student loan debt but we just paid off a 401K loan that we used to bump our house downpayment up to 20%. Right after we bought the house, we saved up $20K and then paid off the $20K loan. Now we’ve still got $32K in student loans but it feels nice knowing that if push came to shove we could pay off the undeferred portion almost immediately. (My husband is in graduate school part-time while he works full-time so his subsidized loans are deferred without accuing interest.) He was out of work for 11 months three years ago so we got more interested in having a bigger emergency fund.

  18. I graduated with $16k in Debt. I saved 1k in my savings and paid the rest off in 1.2 years. I couldn’t stand the 6% interest and how the bank would apply my payments to all the loans instead of the highest interest loans first. $50-60 in interest per month just pissed me off and so I started appyling 50-70% of my paycheck to my debt. I have since been debt free!

  19. I think your advice is solid. Save first what is comfortable to you, then pay down debt as fast as possible. Once all debt is gone but the house, you will have plenty of time to save up that big stash of cash. Having no debt with a big buffer in savings (3-6 months expenses) is an awesome place to be!

  20. I think a most important piece of advice in this post is the “do what’s comfortable for you” point. We all have our individual things we need to do in order to stay motivated and feel secure. Right now our savings is very small, but we’ve got alot of debt to unload, and that’s the mountain that’s causing us the most stress right now, so we’re piling every extra dollar toward that debt. If having a bigger savings is what makes Anonymous feel better, he should do that before pounding on the CCd’s.

  21. Part of it depends on what types of emergencies you might encounter. For me, a family of 8, $1000 would not come close to touching the emergencies so I would want a larger cushion. For me, that number might be closer to $4000. Then attack the debt. But it depends upon the comfort level.

  22. OK, I am seeing my own answer stare me in the face after reading this post. I am getting ready to buy a house, but still have credit card debt. The bank wants me to have no credit card debt. Looks like I have to take my down payment fund and shove it down the throat of my credit card bill. Except, I was really enjoying having money in the bank! But I know it’s stupid to have that low interest cash when I can build it back up quickly. Grr, thanks Ninja and friends for good advice I have to follow…

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