Pay debt off first or build savings

[Tori~CL]

So with everything going on now with the economy..which do you think is more important? I know this is general and everyone's situation is different depending on job security and debt/ratio...

So today as I was paying some bills I put some extra on the debt and not into savings. I started to question that because we could of course pay the minimum on the debt and put more in savings to have something to fall back on however getting out of debt is a big goal for me.

I really sit on the fence with this and my credit score is very important to me. Now we don't have six months savings for all expenses like most financial people recommend but we are putting more towards debt.

So what is your thought on this?

I figure this would be the best place to put this thread at. :)

[Nickle00]

So with everything going on now with the economy..which do you think is more important? I know this is general and everyone's situation is different depending on job security and debt/ratio...

So today as I was paying some bills I put some extra on the debt and not into savings. I started to question that because we could of course pay the minimum on the debt and put more in savings to have something to fall back on however getting out of debt is a big goal for me.

I really sit on the fence with this and my credit score is very important to me. Now we don't have six months savings for all expenses like most financial people recommend but we are putting more towards debt.

So what is your thought on this?

I figure this would be the best place to put this thread at. :)

I'm a member over on FrugalVillage.com and I asked the same question there. Here's thread if you'd like to read the answsers I got there.

http://www.frugalvillage.com/forums/showthread.php?p=1134745#post1134745

[Tori~CL]

I'm a member over on FrugalVillage.com and I asked the same question there. Here's thread if you'd like to read the answsers I got there.

http://www.frugalvillage.com/forums/showthread.php?p=1134745#post1134745

Heh, I am a member there also. I don't post there much anymore. Thanks for the link.

[Tori~CL]

You got really different answers there. Did that confuse you or help?

[Joe]

So with everything going on now with the economy..which do you think is more important? I know this is general and everyone's situation is different depending on job security and debt/ratio...

So today as I was paying some bills I put some extra on the debt and not into savings. I started to question that because we could of course pay the minimum on the debt and put more in savings to have something to fall back on however getting out of debt is a big goal for me.

I really sit on the fence with this and my credit score is very important to me. Now we don't have six months savings for all expenses like most financial people recommend but we are putting more towards debt.

So what is your thought on this?

I figure this would be the best place to put this thread at. :)

In my opinion, building up savings should be your number 1 priority.
The six month's savings rule is designed to protect you in case of job loss, medical emergency or similar problems. I don't see how paying down debt protects you in those circumstances.

You don't say what type or types of debt you have and are trying to pay down. Credit card debt? How many different debts/creditors?
The rule I've heard is that if you have several debts, pay off the smallest one first. Then use the "freed up" funds to pay off the second smallest, and so on.

Can you avoid going further into debt than you already are--just keep it steady for the time being while you build up your savings?

With any debt, I think it is a good idea to have an amortization schedule. The bank gives you one with a mortgage. But you can use a similar schedule on a spreadsheet for things like credit card debt. I think I've posted one of these here on VB in the past.

Now, of course, if you have X dollars per month to put toward savings or debt reduction, you can always split the funds 80/20 or 70/30 or whatever.

ETA: A similar topic was discussed in 2005. My attached spreadsheets for debt amortization are still there. See post 28 in the thread.

http://www.veggieboards.com/boards/showthread.php?t=35496

[Tori~CL]

In my opinion, building up savings should be your number 1 priority.
The six month's savings rule is designed to protect you in case of job loss, medical emergency or similar problems. I don't see how paying down debt protects you in those circumstances.

You don't say what type or types of debt you have and are trying to pay down. Credit card debt? How many different debts/creditors?
The rule I've heard is that if you have several debts, pay off the smallest one first. Then use the "freed up" funds to pay off the second smallest, and so on.

Can you avoid going further into debt than you already are--just keep it steady for the time being while you build up your savings?

With any debt, I think it is a good idea to have an amortization schedule. The bank gives you one with a mortgage. But you can use a similar schedule on a spreadsheet for things like credit card debt. I think I've posted one of these here on VB in the past.

Now, of course, if you have X dollars per month to put toward savings or debt reduction, you can always split the funds 80/20 or 70/30 or whatever.

I have credit card debt in only my name and a car payment. My husband has 3 loans and a car payment also. Are banking is together but our debt is not. (know what I mean)

Funny, because I agree with you. For instance I could have put 50 bucks more into savings the other day but chose to pay down a doctor debt with no intrest. I just want it gone because it's a small bill. I rather knock out small bills than see more in savings. It is sorta like a catch 22 really. It's the feeling of accomplishment but yet this office will be happy with 10 bucks a month.

My intrest rates are very low because I have a very high FICO score as of now.

Whoopsie, I read your post wrong I see now.

[Tori~CL]

Is there a saying that you should pay yourself first before debt?

[Joe]

Is there a saying that you should pay yourself first before debt?

Yes, almost. It is "Pay yourself first" in the sense of putting money into savings, then pay your other bills. I don't think it is directly related to the savings vs. debt-reduction issue. It is more related to having some savings as opposed to just spending all your money.

[Joe]

I read the frugalvillage thread and saw that it mentioned Dave Ramsey. I live in Nashville, as does Dave.

One thing you need to know about Dave Ramsey is that earlier in his life he went heavily into debt and was badly hurt financially. So this negative personal experience colors his views. Put another way, I don't know of any other financial writer who is more fanatically anti-debt than is Ramsey.

Another thing you need to know is that one of the major risks in any financial situation is liquidity risk, i.e., you need a certain amount of cash on hand. I think the weakness of the Ramsey approach is that he neglects adequate liquidity in his obsessive concern for debt reduction. This is where that rule about having six months' worth of living expenses saved comes in.

[Tori~CL]

I read the frugalvillage thread and saw that it mentioned Dave Ramsey. I live in Nashville, as does Dave.

One thing you need to know about Dave Ramsey is that earlier in his life he went heavily into debt and was badly hurt financially. So this negative personal experience colors his views. Put another way, I don't know of any other financial writer who is more fanatically anti-debt than is Ramsey.

Another thing you need to know is that one of the major risks in any financial situation is liquidity risk, i.e., you need a certain amount of cash on hand. I think the weakness of the Ramsey approach is that he neglects adequate liquidity in his obsessive concern for debt reduction. This is where that rule about having six months' worth of living expenses saved comes in.

I know all about Dave and reject several of his veiws. He did file bankruptcy before. This is why I don't post there much anymore. It reminds me of a Dave's religion and tithing to the church. Not my cup of tea. I like Suze Orman better and Dave is the only financial guru that teaches that a FICO means nothing. Yeah right. Nobody will ever know if they will need good credit to turn electric on in their apartment, need to finance a car, or even student loan. I know he has helped tons of people.........yeah.....heh...he teaches to get to a zero concept.

[Beachbnny]

Here's my general guideline that I learned somewhere a million years ago. Save enough to cover yourselves for 3 months as you live now. If something happens and you need some of that money (car, health, etc.) then put it back as fast as you can. Once you have that saved Get Out Of Debt. It makes no sense whatsoever to be saving money while you're paying interest. In fact, when you do the math, saving while paying minimally on your debt is like not saving at all. You'll end up spending what you saved on your debt and interest.

Everyone has different theories but that's been mine. I've had reeeally hard times but I'm still debt free. The most debt we rack up now is $1000 on a CC every once in a while for travel and stupid stuff. We pay it off in less than 3 months every time and actually have some good savings. HTH. Debt sucks :)

[MrFalafel]

Just to chime in here: 3-6 months of savings saved up and then worry about paying off your debts.

[Jinga]

I'm surprised everyone here suggested putting money into savings first. Everything I've heard is the opposite! You need to look at the math. If you're building more debt through interest/fees than you are gaining through savings interest rates (which is the case 99.9% of the time) you are putting yourself further into debt. You should start by paying off your highest interest rate credit cards. If you are paying a high interest rate on your balance every month, you are losing money. Paying just the minimum often doesn't even cover what they are charging you in fees so you can build up more debt even without even using the card. On top of that, they can change your rate at any time, so you could end up with a payment you can't afford somewhere down the line. A savings account will only earn minimal interest so you aren't gaining anything if you're throwing out money on credit card fees every month. In terms of car and home loans, just pay those as scheduled. Unlike credit cards, they should be structured in a way where the interest rate is already worked in and you aren't losing extra money by not paying them off right away.

FYI - A few years ago, I was over 10K in debt in credit cards. With diligence, it took a few years to pay everything off. Once that was gone (last year), I started putting the money I was using for the credit card payment into a savings account. Now I have a nice little amount started for my family. It's scary to think how high my credit debt would have grown if I'd waited to pay it off! :eek:

[MrFalafel]

I'm surprised everyone here suggested putting money into savings first. Everything I've heard is the opposite! You need to look at the math. If you're building more debt through interest/fees than you are gaining through savings interest rates (which is the case 99.9% of the time) you are putting yourself further into debt. You should start by paying off your highest interest rate credit cards. If you are paying a high interest rate on your balance every month, you are losing money. Paying just the minimum often doesn't even cover what they are charging you in fees so you can build up more debt even without even using the card. On top of that, they can change your rate at any time, so you could end up with a payment you can't afford somewhere down the line. A savings account will only earn minimal interest so you aren't gaining anything if you're throwing out money on credit card fees every month. In terms of car and home loans, just pay those as scheduled. Unlike credit cards, they should be structured in a way where the interest rate is already worked in and you aren't losing extra money by not paying them off right away.

FYI - A few years ago, I was over 10K in debt in credit cards. With diligence, it took a few years to pay everything off. Once that was gone (last year), I started putting the money I was using for the credit card payment into a savings account. Now I have a nice little amount started for my family. It's scary to think how high my credit debt would have grown if I'd waited to pay it off! :eek:


But you are not taking into account the current economic climate. In your strategy above figure in 1) a weak jobs market and mass layoffs (people would need liquidity/savings to keep paying bills during long periods of unemployment) 2) currency fluctuation and the potential for hyperinflation (if you wait long enough there is a chance the $10k you owe may actually be worth $5k) 3) possible government bailouts 4) fragility of the companies you owe money to (what happens if the credit card company you owe $10k to goes bankrupt?)

So while your model was indeed a prudent model 2 years ago, current economic factors means its not the ideal model now. Get your savings up so you can live for 3-6 months with no income and then start paying off your debt.

[Poppy]

Most of the experts I've heard recommend building savings now - having at least 6 months of living expenses in the bank - before worrying about debt reduction. However, they are all saying don't risk your credit score either! In other words, always make the minimum payments on time for debt and then build savings. When you have enough money in savings to survive a job loss for six months, then work to pay down debt - starting with the debt with the highest interest rates.

[rabid_child]

We don't really have debt... so... everything extra goes into savings. I mean, we've got a mortgage, and I have student loans that are deferred because I'm in school, but we don't have car loans or credit card debt or medical bills backed up or anything like that. I already have 6 months worth of income saved (granted, I don't make much money). Now we're saving for things we need for the house (exterior work, furniture, carpets, window treatments, kitchen/bathroom/basement remodels). I don't spend money I don't have except in situations where you pretty much HAVE to finance things (education, the house) -- makes it easier to stay out of debt!

[greensgood]

i understand the concept of having 3-6 months of savings. but for us right now it would take literally years to save that much $, so we put the $ towards our debt because you can't really have savings if you owe $ right?

suze orman was on oprah a few weeks ago, a young couple wanted to know if they could afford a wedding, they had around $20,000 saved...however they had debt too (around the same amount), they thought they could use their savings for a wedding, suze "denied" them and explained that they didn't really save any $ because they still had debt and they should use the "savings" to pay off debt so that they can really start saving.

its just another way of looking at it all, im very greatful that we have used our extra $ to pay off debts, my bf was laid off from the post office in Jan., we both agree that it was smart to get out of debt when we had the income to afford it rather than trying to deal with creditors and putting loans into forbearance with his job loss.
we also don't have kids and we are very resourceful when it comes to making $, im sure if we had a family we would be much more focused on saving for emergencies etc., and probably have more debt to deal with as well. But for us it was the right choice to get rid of the debt before saving, and being put in the worse case scenario (job loss) we are very thankful we used our $ this way.

[Skylark]

I would generally say pay off the debts first, depending on how big the debts are compared to your income. It makes no sense to wait to save a cushion until your 30-year mortgage is paid off. But, paying off a high-interest credit card (and NOT using it again) makes perfect sense because a manageable debt there can quickly balloon to something you never anticipated.

My current strategy, given my reduced hours at work, is to get my bills as low as possible (no all-day rounds of texting, less driving, etc) and save what I can. When I have some reserve, then I will start paying my car loan (from my sister) off faster. Because the loan is through my sister, if I would come into really hard times and need to reduce a month's payment or forgo it entirely for awhile, that'd be possible.

[Poppy]

I think the general feeling by the financial experts is that if you have a safety net and lose your job, you will still be able to pay the minimum due on your credit cards and pay your other household expenses out of your savings for several months. If you don't have the safety net, then you might not be able to pay your rent and utilities if you lose your job. Even if you have no credit card debt at that point, you'll either be in financial trouble or you'll have to put everything on those high interest credit cards just to survive.

[Tori~CL]

I think the general feeling by the financial experts is that if you have a safety net and lose your job, you will still be able to pay the minimum due on your credit cards and pay your other household expenses out of your savings for several months. If you don't have the safety net, then you might not be able to pay your rent and utilities if you lose your job. Even if you have no credit card debt at that point, you'll either be in financial trouble or you'll have to put everything on those high interest credit cards just to survive.


Yes, this is the way I understand it.

I know eveyone's situation is different so I can understand both sides because they both make sense.

I am lucky that I have never had a late payment and I have a very low interest rate on my CC. I get torn because some of our higher debt won't be payed off for at least five years. I try to knock out the small debt first and I would feel better if we had more in savings for the reasons listed in this thread. It can be so confusing now. Thanks for all the good info. :)