Recent Divine Discussions

Monday, February 11, 2008

Debt vs. Savings

I have been really contemplating putting majority of my refund ($2000) into my emergency fund. That would bring my balance a little over $5K.

I would then use about $500 to pay down my credit card debt and then use the remaining $129 for myself.

It is just a thought I am entertaining at the moment.

I know I should probably use all the refund to bring down my debt.

I have two weeks to make a decision.

Question for my readers: Debt first or savings?

Don't limit your answer to my current situation. For anyone dealing with debt, how do you prioritize between becoming debt free and building a sound safety net (i.e. Emergency Fund)? Especially when you have children?


ntbeachnc said...

I follow Mary Hunt's Debt Proof Living plan, and she calls for building up savings before seriously tackling debt. The reason for this is if you devote all of your money to paying down debt and not towards savings, if you have an emergency, you'll have to charge it. However, if you have savings, you could've paid it with your savings. It helps break the cycle of being dependent on credit cards. I agree with her, but not everyone does.

Mrs Nespy said...

I agree to make sure you have enough of a nest egg to cover yourself in case of emergency. It can build interest in the meantime while you continue to pay off debt. Otherwise, you may just acquire more debt by having to borrow money for something unexpected!

SingleGuyMoney said...

Why make it all or nothing? How about splitting it between the two?

Single Ma said...

Most PF gurus would recommend saving a small amount to cover basic necessities (maybe 1 mon expenses), then channel all resources toward debt. Personally, when I had debt, I saved first.

However, I had no CC debt, just a car and student loans - both financed at 5.5% or less. My logic: the savings rate and the loan rates were about the same, so there was no risk to making either a priority.

If I had CC debt, my decision may have been different. When you really think about actual dollars and cents, why would you save a large lump sum (greater than 1 mon expenses) earning ~3% in a savings acct (less than that after taxes) when you have debt growing at 10% or more?

If I were in your shoes, I'd save 1 month expenses, tackle CC debt, save to max e-fund, then tackle other debt. But this is just my $0.02. You gotta do what works for you.

Jon said...

I agree with splitting it up. If you have high interest debt, then 75% debt and 25% savings sounds good. With low or mid interest debt, I think 50/50 is good.

Once your bank account is built up to a level you're psychologically comfortable with, I'd do 50% debt, 10% savings, and 40% investments.

You should never stop saving some percentage in cash. It's an important part of a balanced investment portfolio.

Fabulously Broke said...

I agree with Jon's strategy.

I'm kind of a .. die-hard DEBT FIRST kind of woman.. so I'd throw mine into debt but.. feel kind of a twang about putting $500 into my EF just to feel good about it

Dimples said...

@ Everyone

Thanks for your suggestions. Single Guy is right......who says it has to be all or nothing. I will split the refund between my savings and cc debt. I just need to figure how much goes where.

wealthy_1 said...

I'm of the same philosophy as fabulously broke. I would reduce the debt. The faster that's gone the faster you'll be able to build that emergency fund.

Tired of being broke said...

It depends on how much you would need to cover your expenses for one month. I currently only have $1,000 in liquid savings. All my other additional monies goes toward paying off my credit card debt. I would add another $1,000 to the savings and put everything else toward the debt.

Also, you may want to adjust your witholdings at work. I am not a fan of overpaying uncle sam, and that is all a refund is.