PinchingPennies

Saving money to pay off student loans and consumer debt

Save Money or Pay Off Debt?

We have a larger emergency fund then Dave Ramsey recommends and we still have debt. We go back and forth about whether we should have less in savings and pay off more debt or keep our savings.

Dave Ramsey recommends: $1000
We have: $9000

There are a few reasons for having a larger emergency fund.

Pros:
Husband is in grad school and if I lost my job I could hold out before putting kid in daycare fulltime.
Husband finishes in 1 year and we have some foreseen expenses for him to get a job (travel, postage for 100 applications, moving out of state expenses).
When husband gets job, we could pay off all of our debt in 6 months.

Cons:
We could pay off entire car loan.

I think we should keep the savings because our financial outlook will be drastically different in a year. We also need cash for those things that are going to be coming up.

It is just hard to sit on the money and not send it to Capital One.

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July 5, 2008 - Posted by | Car Loan, Debt Snowball | ,

2 Comments »

  1. You have $9,000 in emergency money, and how much debt at what interest rate?

    If you can pay the debt, but still have the ability to access cash at a reasonable rate, paying the debt can make sense.

    With low balance accounts paying under 2%, and CC interest as high as 24%, every $1000 siting in savings is costing you $220/yr. Interest down the drain, which can be money in your pocket either to pay other debt down faster or to start building a real savings account. I know the diehard Dave fans will stick by his advice, to the letter, but this is one subtle point where I disagree with Dave’s order.

    One other comment, when you have a couple thousand you are committed to keeping in savings long term, consider the Roth IRA. For a true emergency, you can take the withdrawal of the amount you deposited with no penalty at all. If no emergency arises, you started your retirement savings in an account that will grow tax free, and a tax free withdrawal at retirement.
    Joe

    Comment by joetaxpayer | July 5, 2008 | Reply

  2. Normally I would agree with you but I think our particular circumstances make that calculation a little different.

    1. Our higher interest credit card is paid off.
    2. Our lower interest credit card is at 0% until the end of the year and I have the money in an ING Direct savings account earning interest until the interest rate jumps.
    3. The payment would go toward our car loan which is at 9%.
    4. The savings is at 3% interest.

    and most important:

    5. We have several thousands of dollars of anticipated expenses coming up in the next year. If we don’t have savings, we will have to put them on a credit card at 15% interest.

    Comment by bloggingawaydebt | July 6, 2008 | Reply


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