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Member |
What do you all do? A couple of years ago I got in to a pickle when we had a small fire in our house. We were out of the house for about 6 weeks. Hotel, food, and other expenses quickly drained our savings and had me worrying about how I was going to pay for everything. We had been following Dave Ramsey's advice up to that point. We had $1000 set back for an emergency fund and had been putting any extra money on our debt. I learned real quick that $1000 doesn't go far for a family of four. I absolutely hate debt and want it gone. We have a little money saved up and will be getting a good tax refund. Part of me wants to put it all on debt but I also remember being in a hard spot so that has me wanting to save some. How do you all balance paying debt vs saving? | ||
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Member |
The $1000 for emergency is a starting point and the least amount you have. You adjust it from there according to your situation. Once you have that amount saved then start working on the small est debt to get the snowball going. ΜΟΛΩΝ ΛΑΒΕ | |||
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Armed and Gregarious |
1st, I'd advise putting some of your refund into savings for emergencies, but most toward the debt. The quicker you remove the debt, the faster you build the savings, and invest for longer term goals. 2nd, adjust your tax withholding so you don't get a refund next year. Rather, than giving the government an interest free loan until you file, and get the return, you will have the money to immediately apply to your debt, and/or savings, each month. ___________________________________________ "He was never hindered by any dogma, except the Constitution." - Ty Ross speaking of his grandfather General Barry Goldwater "War is the remedy that our enemies have chosen, and I say let us give them all they want." - William Tecumseh Sherman | |||
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Member |
Your emergency fund is supposed to be $1000 until you pay off your debts, after that, you build up your fund to equal AT LEAST 3mo of pay. We do 6 mons but will bump that to 9. We can do that because we are debt free! Keep it up, it'll all be worth it! Hedley Lamarr: Wait, wait, wait. I'm unarmed. Bart: Alright, we'll settle this like men, with our fists. Hedley Lamarr: Sorry, I just remembered . . . I am armed. | |||
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Member |
I think it all depends on what type of debt you are discussing, and how much time it would take to pay off. I like Dave Ramsey’s overall premise, and my wife and I have been paying back a very large student loan debt on an aggressive basis. We keep several months worth of expenses in a high-yield savings account, which is basically “borrowing against our debt”. However, the spread between the savings interest rate and the loan interest rate is around 2.5%, so it is not a very high carry cost for that peace of mind. Here’s my basic guide: 1. High interest debt, but short payback (I.e., less than 6-12 months to pay it off): full steam ahead. Prioritize debt payment over savings. 2. High interest debt, but long payback (+12 months): build a small amount of savings, then pay off debt. 3. Low interest debt, short payback: tossup. Most would build some savings, then pay debt. 4. Low interest debt, long payback: build a good amount of savings, then pay debt. In our particular situation, we have a huge amount of debt at 4% fixed interest rates. We built up a 6 month savings, aggressively cut all spending, and pay off debt ruthlessly. We will have paid off a private law school and an expensive MBA before we hit our 5th anniversary. | |||
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| Member |
We have that $1000 and then some. $1000 just doesn't go far in a real emergency though | |||
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| Armed and Gregarious |
No, it does not, and I'm sorry you're in such a tough spot, but the sooner you pay off the debt, the sooner you can shift the money to other things, including a more robust emergency fund. I wish you good luck getting through this. ___________________________________________ "He was never hindered by any dogma, except the Constitution." - Ty Ross speaking of his grandfather General Barry Goldwater "War is the remedy that our enemies have chosen, and I say let us give them all they want." - William Tecumseh Sherman | |||
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| Blinded by the Sun  |
Debt snowball it works! ------------------------------ Smart is not something you are but something you get. Chi Chi, get the yayo | |||
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| Member |
It’s a balancing act, trying to cover all the bases all at once, all the time. I’ve been doing it for years. I have a fixed amount going to 401k every paycheck, always, company matches to a point so that part is free money. And it’s encouraging to see a balance actually growing. I got whacked with a medical bill last year that I’ll pay off this year, so fixed amount goes to that. I try to maintain at least two months expenses and more in my interest paying chking acct, so that’s my emergency fund (as well as a credit card I never use but it’s available.) I drive a 20 year old truck I wouldn’t be without. Set aside an amount for monthly fixed expenses and then hope nothing goes wrong, but it will. Save, invest, pay your bills, and any money left over, spend a bit on your family for whatever. You all need a life after all. You do your best with what you have and hold on. Good luck. | |||
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| Member |
Thanks but I'm not really in a tough spot. I'm just trying to figure out the smart thing to do with the money. I guess I'm trying to figure out how much is enough to have saved before I really start hitting the debt hard again. I know Dave Ramsey says pay off debt then save up 6 months of expenses. I'm thinking about switching that and saving the big chunk first. | |||
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| Armed and Gregarious |
I don't pay attention to Ramsey, but if that's his advice I'd say he's right. You're just accruing more debt (interest on the debt) by putting off paying down the debt. Paying down the debt faster, will put you in a better financial situation much faster. Think of your money as being out in the ocean on a lifeboat. The debt is a like hole in the side of the boat, causing it to fill with water, and if not worked on will cause the boat to sink. Savings/investments are like collecting rain water to drink. If the boat is sinking, bailing it out and patching the hole, needs to be done before you collect water to drink. The sinking boat is a much more immediate problem than collecting drinkable water. You absolutely need to do both, but one must be done first, or you risk drowning, before dying of thirst. ___________________________________________ "He was never hindered by any dogma, except the Constitution." - Ty Ross speaking of his grandfather General Barry Goldwater "War is the remedy that our enemies have chosen, and I say let us give them all they want." - William Tecumseh Sherman | |||
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| Do No Harm, Do Know Harm |
Another idea is paying your extra debt in installments. Throw the $100 or $500 or $1,000 that you’re using for extra debt payments and put it in a savings account. Once you get a predetermined amount, say $2,000 or $5,000, then move it all to a debt. Repeat. You pay a little extra in interest, but you usually have a chunk for larger emergency. But it will only work if you’re disciplined. Knowing what one is talking about is widely admired but not strictly required here. Although sometimes distracting, there is often a certain entertainment value to this easy standard. -JALLEN "All I need is a WAR ON DRUGS reference and I got myself a police thread BINGO." -jljones | |||
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| Member |
There’s another side to this coin. If you have a lot of debt, at relatively low interest rates, you SHOULD build up a good amount of savings. Why? Because money, once used to pay a debt, is gone forever. Here’s a sample situation: Scenario 1: John, with a family of 4 and a mortgage, spends $6,000 a month. He has 6 months of savings built up ($36,000), $200,000 debt at 4%, and his savings is in a high yield account averaging 1.5%. He is losing $900 a year in additional interest, but when he is laid off keeps the family afloat, finds an equal job at the end of 6 months, and is happy. Scenario 2: John, a huge proponent of Dave Ramsey, has a family of 4 and mortgage, spending $6,000 a month. He has $1,000 in savings, and used the other $35,000 to pay of 4% interest debt, of which he now has $165,000. His yearly savings, in interest, is $1,400. However, John is laid off and rapidly depleted his $1,000 fund. He turns to credit cards, and is able to keep the family afloat by racking up $35,000 in debt at 20% interest. This forces him to look for a job quickly, and he finds one that pays less. Initially, on a yearly basis he was $2,300 better off than John 1, but after the layoff he is $4,700 worse off ($35,000 @ 20% interest - $2,300). Additionally, now John still has his original debt payments to service, plus a monthly credit card bill that is astronomical. He is most likely trapped. By the way, this is a true story. I was “John” in scenario 1, and went 8 months before finding a new job. I wouldn’t change a thing, and have a 6+ month savings cushion. | |||
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| Member |
The emergency fund as Dave says at the beginning is not to take care of all unforeseen emergencies it a fund to take care of a lot of them. If you have a family of four you decide what you need I myself had at the time I had debt an emergency fund of $2000. The important thing is to try to work on your debt as soon as possible. Then after your debt is taken care of except mortgage you build up your emergency and investments saving for college funds and paying down your mortgage. ΜΟΛΩΝ ΛΑΒΕ | |||
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| Member |
Keep a little cash $1000. Pay off debt with the rest. If you get in a pickle, you can always use your credit cards to pay for hotels, food, situations if you have to. But the interest rates on credit cards are a heck of a lot more than you're going to make on cash sitting in a savings account. | |||
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| Armed and Gregarious |
Is all, or even most, of the $200K in debt, a mortgage on a home? While it's generally better to eliminate debt, mortgage debt is different, as real estate is likely (although not guaranteed) to increase in value over the life of the loan. Further, if a situation is truly dire, a person can borrow against the equity in the real estate. However, typical "consumer debt" such as credit card debt, car loans, etc, are not debt tied assets that are likely to appreciate in value like real estate. If the OP's debt is entirely for a mortgage, with a very low interest rate, I would agree that building up an emergency fund, might be better than accelerating the paying down of the mortgage. However, I was assuming the debt he is discussing is not a mortgage, for a primary residence. Hopefully he will clarify whether that is the case. ___________________________________________ "He was never hindered by any dogma, except the Constitution." - Ty Ross speaking of his grandfather General Barry Goldwater "War is the remedy that our enemies have chosen, and I say let us give them all they want." - William Tecumseh Sherman | |||
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| Member |
Great question, and I do hope he clarifies. If it is mortgage debt, then throw out most of what I said, as a mortgage provides venues for refinancing/ extracting equity. In my particular situation, the debt figure was doubled, and it was all student loans. | |||
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| Ammoholic |
A factor to consider is the interest rate on the debt and the difference between that rate and the rate you are paid on your savings. (If you can find a reputable depositary that will pay you any meaningful rate on a few thousand dollars, you’re the man.) I’d be in a much bigger hurry to pay off debt where I was paying 10 or 12% interest than where I was paying 4% interest. Also, you gotta sleep at night. If having only $1000 in savings is affecting your sleep, put another thousand or two in savings, then pay down debt. And absolutely stop making interest free loans to the government. Whether that money is in savings (bringing you peace of mind and a little interest if you are lucky) or used to pay down debt (helping you get ahead and reducing the “bleeding” of interest, it can definitely be better used than a free loan to the government. | |||
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Prepared for the Worst, Providing the Best |
I have four kids, and we are a single-income family. I believe in paying off debt as quickly as possible, so we have little debt and live pretty simply...but if I only had $1000 in savings I wouldn't be able to sleep at night. For most folks that wouldn't even be a mortgage payment. The thing to consider is how many recurring payments do you have to make a month, and how easily are they terminated if necessary. What would you need to have on top of that to survive? I'd budget that out, and then strive to have enough on hand to get through at least 3 months of unemployment (preferably more, but I realize that may be a lot for some folks to attain). I am not an avid listener of Dave Ramsey, but knowing what I know about him, I imagine he intended $1000 as a starting point or bare minimum, not necessarily the end goal for an emergency fund. As others have said, it also depends on what type of debt you're talking about. If it's just a home mortgage, I'd say you can afford to focus on building up that emergency fund for a while. If it's credit card debt at 20% interest, you need to get rid of that ASAP. | |||
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eh-TEE-oh-clez |
Dave Ramsey's plan is solid. I recommend it to people all the time, and have used it myself to get out of debt. The $1000 is intended as a laser-focused attempt to stop using your credit card. The idea is that keeping the $1000 on hand will save you from falling into the habit of using your credit card for "emergencies." Dave Ramsey puts "emergencies" in quotes as most things in life are not truly emergencies. Car repairs can be anticipated and budgeted. Insurance for catastrophic events can be budgeted for. But, if something does come up out of the blue, then you have a little cash set aside. Dave then recommends paying down your debt except your mortgage (debt snowball) and then putting together 3-9 months worth of expenses in savings to protect against disruption in your income (job loss, illness). Then you save for retirement and attack your mortgage last.This message has been edited. Last edited by: Aeteocles, | |||
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