Keep building savings or more aggressively pay off debt?

bmo88 · January 2015

We owe $58,000 in debt and pay $1,600 a month toward it. At the moment, we have $6,500 in savings (not including our retirement accounts) that's about 2.5 months worth of expenses. We save between $600 and $750 a month. Our plan is to keep saving that until we get to five months emergency savings (about $15,000) and then start putting the extra money toward debt. That will take us about 10 more months. My question is, does this seem like the best approach? Or should we prioritize paying down our debt now? Note I formatted this post but I think it is messed up because I am on my iPad. Sorry it's a huge block.

Wulfgar · January 2015

Since you are currently overpaying on all of your debt, all at the same time, it might make more sense to chose one and attack that with all of your extra debt payments.

What I would do is attack your car loan first since this is the smallest since if you attack this aggressively it should be paid off roughly the time that you have your five months emergency fund. This will allow you to take your total car payment including your extra and your savings to tackle either your student loans or your mortgage.

als1982 · January 2015

First, everyone's feeling about debt and level of comfort is different. I tend to be on the debt averse side, but I'm also not one to hoard big amounts of cash in an emergency fund either.

Second, I think we need to know a little more about your situation. How old are you? Is your mortgage a 15 or 30 year? What are your life goals that you need your financial needs to help you meet: Do you have/want kids? Plan to SAH? Pay for their college either partially or fully? Buy a new house soon? Plan to work until you die or retire early?, etc. Also, I can understand wanting to keep your income private, but by saying what you make is "solid" could mean different things to different people, based on where they live and what they take home themselves.

Your student loan interest is fairly high, as is your mortgage interest. But back to your income: *It's my understanding based on our own situation* that if you combined make less than $155K you'll be able to deduct the interest paid on your student loan, and it takes an income of more than $300K to no longer be able to maximize the mortgage interest deduction. So, in my personal opinion, if you make below those thresholds, since your balances are fairly low and you're getting some benefit from the interest, I'd hold off on paying any more than you already are (but do keep overpaying some, especially on the mortgage).

From there, *again, if it were me, not knowing more about your situation* I'd make sure you're putting at least 15% of your income into retirement accounts. Get whatever employer match is available, then (if you make less than $180K) work toward maxing out a ROTH for each of you.

If you still have money left, then I'd pay off the car, because even though it's not a huge amount, that interest benefits you in no way. After that's gone, I'd start stockpiling more money in a high interest savings or some type of money market account.

lifeonthehill · January 2015

Since you have a solid income and are able to use so much towards debt payment and savings I would personally keep saving.

As for the debts I would take all the extra you are throwing at the others and pick one to pay off. I suggest the car since it is smallest. Take the $325 you already pay, the extra $500 for the loans and the extra $210 for the house and you would be throwing $1045 a month at your car loan. That would pay your car off in 8 months.

Then you can take the $1045 plus the $250 for the student loan minimum and throw $1295 at the loans. Not to mention you would be mostly done with your savings goal so that is another $600 totaling $1895. Which means you can have the student loan paid off in roughly 13 months.

Now you have $1895 plus the $165 minimum for the mortgage totaling $2060. That manes your house would be paid off in 13 months.

You could be 100% debt free in Oct. 2017 if you were able to completely stick to it.

brij2006 · January 2015

If it were me, I would apply all of the extra amount to the smallest debt first, then snowball that onto the next one once it's paid off.

bmo88 · January 2015

Thanks for the advice ladies! A little extra context: -We make about $110,000 combined (median household income for our area is $50,000) -We contribute 18% of our income to retirement -We want to start TTC in about 2-3 years -We are 26 and 28 years old -We are also saving on the side for a trip to Europe ($6,000 total) I am wondering if it would be worth it to consolidate the student loans to get a lower interest rate (it's 5 separate loans). Not sure what the fees are though. I will definitely be discussing your ideas with DH today.

als1982 · January 2015

bmo88 said:

Thanks for the advice ladies! A little extra context: -We make about $110,000 combined (median household income for our area is $50,000) -We contribute 18% of our income to retirement -We want to start TTC in about 2-3 years -We are 26 and 28 years old -We are also saving on the side for a trip to Europe ($6,000 total) I am wondering if it would be worth it to consolidate the student loans to get a lower interest rate (it's 5 separate loans). Not sure what the fees are though. I will definitely be discussing your ideas with DH today.

Sounds like you are doing great! Frankly, again if your jobs are secure and/or you can afford your lifetime on just one of your incomes, I'd move forward with killing the debt starting with the car and then the student loan followed by the mortgage. I personally think that $6,500 in an e-fund is more than enough, particularly if a chunk of your retirement is going into ROTHs, from which you can withdraw your deposits in the case of a true major emergency.

And enjoy Europe! (Although again, not sure where you're flying from, going exactly, how long you're staying, and/or if you plan to use points, but personally, I'd bump that budget amount up a bit, but that's just me and my experience...)

bmo88 · January 2015

als1982: Hi there! We actually don't have any ROTHs yet. They are something I would like to set up. We both work at a school, so we have a somewhat unique situation. We are required to contribute 8% through PERA (government equivalent of Social Security) and that goes into a personal account, not a pool like SSI though. Then we contribute 10% on top of that to 401ks through our employer. There is no match at this time though we will be "vested" at 5 years and then get a match (that's 2 years away though). So I am debating whether or not we should switch to ROTHs.

We haven't decided our final itinerary yet for Europe. Hoping to go for 2 weeks this upcoming November. Thinking about Italy, Germany, London and France.

I forgot to mention, we have one other debt that we are paying off with 0% interest. It is from our living room furniture purchase ($1,500 left) and it will be paid off in 4 months. So that will free up some income as well.

als1982 · January 2015

bmo88 said:

als1982: Hi there! We actually don't have any ROTHs yet. They are something I would like to set up. We both work at a school, so we have a somewhat unique situation. We are required to contribute 8% through PERA (government equivalent of Social Security) and that goes into a personal account, not a pool like SSI though. Then we contribute 10% on top of that to 401ks through our employer. There is no match at this time though we will be "vested" at 5 years and then get a match (that's 2 years away though). So I am debating whether or not we should switch to ROTHs.

We haven't decided our final itinerary yet for Europe. Hoping to go for 2 weeks this upcoming November. Thinking about Italy, Germany, London and France.

I forgot to mention, we have one other debt that we are paying off with 0% interest. It is from our living room furniture purchase ($1,500 left) and it will be paid off in 4 months. So that will free up some income as well.

Awesome!! For the next to two years at least, I would absolutely take what you can and put it into ROTHs instead of 401Ks, if you're NOT getting a match. Then, after two years once you ARE getting a match, only contribute up to what is required to get the match, and then everything else goes in the ROTHs. ROTHs are great because while you pay tax on the income earned now, those dollars have decades to grow, and then once you retire, withdrawals are tax free.

For Europe trip planning, we always average $1500 per person for flights (sometimes they're more, sometimes less: we're near an airport in the Midwest that isn't an international hub, if you're near one of those especially Newark, New York, DC, and Atlanta, you could likely find cheaper), $100 a day combined for meals, $250 a night for hotel (we're headed to London and Paris this spring and since those are pricey cities, we're budgeting $300 here), and $100 per person a day for excursions/general spending, plus a healthy $500 pad for incidentals. Plus, you'll need to add an additional line item for transportation between countries.

Just a suggestion, but if you have the time, I'd add Spain to that list. We LOVE Barcelona. Its the one place we've been to multiple times that we still want to visit again and again. Also, Greece is a good place in the EU to get a good value for your dollar.

bmo88 · January 2015

als1982 said:

bmo88 said:

als1982: Hi there! We actually don't have any ROTHs yet. They are something I would like to set up. We both work at a school, so we have a somewhat unique situation. We are required to contribute 8% through PERA (government equivalent of Social Security) and that goes into a personal account, not a pool like SSI though. Then we contribute 10% on top of that to 401ks through our employer. There is no match at this time though we will be "vested" at 5 years and then get a match (that's 2 years away though). So I am debating whether or not we should switch to ROTHs.

We haven't decided our final itinerary yet for Europe. Hoping to go for 2 weeks this upcoming November. Thinking about Italy, Germany, London and France.

I forgot to mention, we have one other debt that we are paying off with 0% interest. It is from our living room furniture purchase ($1,500 left) and it will be paid off in 4 months. So that will free up some income as well.

Awesome!! For the next to two years at least, I would absolutely take what you can and put it into ROTHs instead of 401Ks, if you're NOT getting a match. Then, after two years once you ARE getting a match, only contribute up to what is required to get the match, and then everything else goes in the ROTHs. ROTHs are great because while you pay tax on the income earned now, those dollars have decades to grow, and then once you retire, withdrawals are tax free.

For Europe trip planning, we always average $1500 per person for flights (sometimes they're more, sometimes less: we're near an airport in the Midwest that isn't an international hub, if you're near one of those especially Newark, New York, DC, and Atlanta, you could likely find cheaper), $100 a day combined for meals, $250 a night for hotel (we're headed to London and Paris this spring and since those are pricey cities, we're budgeting $300 here), and $100 per person a day for excursions/general spending, plus a healthy $500 pad for incidentals. Plus, you'll need to add an additional line item for transportation between countries.

Just a suggestion, but if you have the time, I'd add Spain to that list. We LOVE Barcelona. Its the one place we've been to multiple times that we still want to visit again and again. Also, Greece is a good place in the EU to get a good value for your dollar.

Thank you for the advice! We are near Denver, so prices fluctuate between $1100 and $1,300. We found a deal that if we fly through Iceland (and do a 24 hour layover) it would only be $875 a ticket. I think we are going to go for it. We are contemplating Spain, but its so tough with so many options!

formerlyGDaisy09 · January 2015

bmo88 said:

Thanks for the advice ladies! A little extra context: -We make about $110,000 combined (median household income for our area is $50,000) -We contribute 18% of our income to retirement -We want to start TTC in about 2-3 years -We are 26 and 28 years old -We are also saving on the side for a trip to Europe ($6,000 total) I am wondering if it would be worth it to consolidate the student loans to get a lower interest rate (it's 5 separate loans). Not sure what the fees are though. I will definitely be discussing your ideas with DH today.

You can look into consolodating, we found that most places were just taking a weighted average of our current interest rates, so it wasn't really saving us anything...additionally there were some fees associated with transferring funds. we ultimately decided it wasn't worth it, but feel better about leaving things as they are since we did the work to look into it.

hoffse · January 2015

First of all, you're doing great.

Second - I wouldn't overpay on your mortgage or car loan. Work on the student loans for now since they are the highest interest if you feel the need to overpay on loans. Personally, I wouldn't start overpaying on any of these loans until Roths are fully funded each year.

Granted: I'm not debt adverse, and I'm pretty into debt-leveraging. It's worked well for us.

For Europe, I agree you need to up your budget, especially if you want to go for 2 weeks. I love Europe - H and I have been there a couple times and we have a couple more trips planned - but it's expensive. I would personally knock off London. It's an amazing city - we just visited a few months ago - but it's very busy, very very expensive for Americans because the exchange rate against the pound absolutely sucks, and it's one of those cities that would be great to do for a week as a family trip later with kids. It's super kid friendly, and there's so much to see that you can really just settle in for a week, visit the sites, take a couple day trips, and be done. It's also a lot like New York. If New York were in Europe, it would be London.

I personally would do an itinerary where you fly into Paris for 3-4 days, train to Barcelona for 2-3 days (there's a high-speed train connecting the two cities), and then fly to Rome on Vueling or Ryaniar to spend the rest of your trip in Italy. Flights between Barcelona and various cities in Italy are dirt cheap (from $38/person), and Vueling is based out of Barcelona so there are tons of options. Fly out of Rome on your way home.

Then again, I'm partial to the Mediterranean areas. And Rome is my favorite city I have ever been to in the world. I like it much more than Florence, London, etc. For me it's that absolutely perfect blend of old & authentic, slightly gritty, gorgeous weather, and one-of-a-kind landmarks. When I visited Florence I felt like I was in Epcot to be honest. I felt the same way in Bath, England. Too clean. To perfect. More tourists than locals. The Florentines actually spoke better English that I did.

It all really depends on what you want to see, though. If you are into art, you aren't going to do better than a Paris/Rome/Florence split (though I personally hate Renaissance art, so that's another reason I didn't like Florence... I'm in the minority on that though). If you want to see Roman ruins then I might do southern France and Italy from Rome on down to the south. Maybe squeeze in Spain too if there was time for that. If you like big/modern cities, then London, Berlin, etc. would be right up your ally. Whatever you do, make sure to fly into one country and out of the other. It costs just about the same as flying roundtrip from the same place, and it saves you from having to back-track.

We love talking travel on this board, if you haven't noticed

brij2006 · January 2015

I wouldn't worry about consolidating the student loans. Just work at them one at a time, and start with the smallest and move your way up. Your minimum payment will change once you have one paid off.

strickland8052 · January 2015

You are doing fantastic. All of this is really up to you and your comfort level with debt; there is really not a bad way to do this. I personally am with Hoffse on debt leveraging, especially considering your debt is not so bad.

If I were you, I would not worry too much about paying off that car early, since it is such a low interest rate.

The mortgage and student loan interest rates are both a little high, especially for today's rates. I would probably check into getting those lowered.

Once lowered, I would not be in a big rush to pay those off. You can get tax deductions on the money you pay towards interest for both student loans and mortgage. In my opinion, you might as well take advantage of those deductions and/or low interest rates (if you can get them), by paying the debt off slowly and pumping the extra money into savings instead. In the meantime, you could be making 7 to 15% return by investing that money(preferably through a ROTH). With that said making 7% return instead of avoiding a 5% interest is just more profitable, especially when that interest is tax deductible.

If you can't get those interest rates lowered, I'd probably focus on paying off the student loans first. The interest rate is higher, and I'm just not a fan of paying off mortgages early. Considering how volatile the housing market has proven to be, I just don't feel comfortable tying up most of my money in my home's equity. I'd rather have that money somewhere more liquid, so I am free to use it in the event of an emergency.

I think to answer this, you just have to ask yourself a lot of questions. Do you plan on being in your current home forever? How secure do you feel in your jobs, with the future value of your home, with the future of the stock market? If there were some kind of emergency, would you rather have a big hunk of money to draw from quickly, or would you rather have low expenses to ride out that emergency on a month to month basis? Maybe also write out some different scenarios and compare which scenario makes you feel more comfortable and which scenario puts your money to work best. Don't forget to consider tax deductions, fees for refinancing, and fees for paying off mortgage early (sometimes that can happen).

Keep building savings or more aggressively pay off debt?

Re: Keep building savings or more aggressively pay off debt?

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