Which comes first? Paying off Debt or Saving?

bekt14 · July 2015

I really want to pay off all our debt as soon as possible. I'm a huge Dave Ramsey enthusiast. If we really buckle down we could pay off everything in 7 years (even the mortgage).

But, I also realize that we need some savings.

I'm constantly having an internal debate trying to figure out how much to put towards loans and/or savings. Right now we can afford about $4000/mo towards either one. I've been doing about $3500 towards debt and $500 towards savings, but I'm wondering if it would be worthwhile to slow down on the debt a little and save more.

We spent all our savings for the wedding and then buying a house last year, so we only have about $3000 in savings currently. I know that's not enough, but I would rather pay off debt....

Any advice?

simplyelise · July 2015

This is very much about the financial personality and goals of you and your husband.

As a DR follower, you know he says to drop down to 1k in savings and stop all retirement contributions while paying off debt. After you pay off all debt (except the house!) you save up 3-6 months of expenses. Then you focus on retirement savings, college savings, and paying off the house.

DH and I follow most of DR's advice. But DH is uncomfortable with only 1k in savings. We have our savings at 3k right now. But that keeps in mind that we could live off of either one of our salaries if one lost a job, we have outstanding health insurance, we have two fully paid for cars (and put $100/month towards a replacement fund currently at $700), and we don't own a house or have children. Some people with a lot more natural risk in their lives - children or medical situations or unstable jobs - might want to do more than DR suggests or more than we are doing. If you really feel it's necessary, you could save up until you reach 6 months of expenses and then put everything towards debt. You've got to figure out what you're comfortable with.

Something you might want to factor in here is how far you are from being debt free. DH and I are 9 months in to a 21 month journey to pay off our loans. Holding on tight for less than two years is not that big of a deal for us.

How much debt do you have and how quickly could you pay it off if you put the full $4000 a month at it? How much is your monthly expense total and what would you need to save to have 3 months expenses? six months expenses?

ETA: TK cut off my last couple sentences?

cbee817 · July 2015

I would get at least 3 months (I make sure we have at least 6, but we also have 2 kids) in a emergency fund first. Then work on debt leaving your mortgage last to payoff. CC, SL, cars, etc in the order of highest interest rate or quickest pay off.. whichever you like. Keep us updated- GL!

csuave · July 2015

As others have said, every situation is different. I like the following plan:
1. Save an e-fund that meets your basic needs/you are comfortable with while paying minimums on all debt
2. Group debt into high interest and low interest. Hopefully mortgage and SL are low interest. Pay off high interest debt first.
3. Does your company match retirement? Next start investing something in retirement and definitely take care of free money in the company match if they offer it. This is a priority for us over mortgage and SL because mortgage and SL rates are under 4% interest and the return on retirement investment is higher than that.
4. Increase savings to have cash on hand to buy new cars, cover emergencies, go on vacation, etc. Keep increasing retirement at the same time.
5. After savings is further built up focus on retirement according to those goals for retirement age and standard of living and tackle SL at the same time.

We are currently working on #4. After we move past 5 I think we may work on the mortgage in a less active way, like doing a couple extra payments a year. It is not a priority on our current radar.

Not stated in my plan, but something that we do, is charitable giving. It is something to also consider according to your preferences.

All of your goals will be easier if you take a look at your budget and spending and find ways to cut the fat. "Finding" extra dollars this way can go very far especially when your snowball gets rolling. If you want help with this post your budget/bills on this board and people will give you some good suggestions.

bparkhur · July 2015

For me, it would depend on the kind of debt. I would certainly pay off high interest-bearing credit cards before adding to savings; however, I would bulk up my savings to have at least three months of expenses before being really aggressive with the mortgage, for example. Are you saving for retirement at all?

strickland8052 · July 2015

My motto is "let the interest rates be your guide!" If the debt's interest rate is higher than 6%, I'd probably go ahead and try to get that nailed down. If it is below 6%...eeh. That money would "work harder" if it went in a ROTH, where it would make at least 8-10% interest plus it would also allow you to cash in on compounding interest.

I think the type of debt matters too (I'd focus on car loans, student loans and CC way before mortgage). After the real estate bubble burst, I'm in no rush to pay off my mortgage. I wouldn't want to pump all this money into my home and then find myself in a situation where I needed cash but all I have is this house that was once $300,000 but is now worth only $120,000. In other words, I'd much rather have money in the bank than tied up in real estate.

That is awesome that you have $4k to apply towards something. If I were you, I'd definitely make sure I was contributing at least 15% of my income to retirement. After that the priorities would probably go like this (and I'd probably contribute to multiple ones at the same time vs. trying to tackle them one at a time):

1. $5k e-fund
2. Debt over 6%
3. 3 month e-fund
4. Non-mortgage debt between 3%-6%
5. 6 month e-fund
6. Any other important savings needs (home down payment, children's college funds, new car fund, expected home repair fund, etc.)
7. Non-mortgage debt under 3%
8. Extra towards retirement and other savings needs
9. 9 month e-fund
10. Even more towards retirement and other savings needs
11. Mortgage payoff

als1982 · July 2015

Everyone has different priorities and different levels of comfort.

We are personally very anti-debt, but not to the detriment of our retirement savings. So, we max out both our ROTHs and put an additional 10% of our pre-tax income into our 401k/403b. After that, we put everything extra that's left toward debt. Right now, that's student loans. If we had high interest consumer debt, we'd likely lower but not eliminate completely the retirement savings in order to get that paid off.

In terms of a liquid emergency fund, we keep very little, around $1,000. But we live well below our means and can afford all of our expenses on just one of our salaries. We also have no children.

vlagrl29 · July 2015

personally I would get a 3 month emergency fund and then aggressively pay off your bad debt loans like credit cards and then focus on your good debt like house and school loans. Yes I believe there is good debt

als1982 · July 2015

vlagrl29 said:
personally I would get a 3 month emergency fund and then aggressively pay off your bad debt loans like credit cards and then focus on your good debt like house and school loans. Yes I believe there is good debt

Do know there is an income threshold at which student loan interest paid is no longer deductible. (I believe right now that point is $160,000 for couples filing jointly.) At that point, student loan debt offers no benefit and we consider it the same as any other consumer debt owed.

brij2006 · July 2015

We are avid Dave Ramsey followers as well, and are baby step #7. We did his plan 100%, and did not veer from it at all. That includes the $1,000 emergency fund.

If you live all of his principals, then the $1,000 emergency fund is just fine. Get yourself fully out of debt, and make that your #1 priority.

brij2006 · July 2015

I highly recommend listening to his radio show at least once a week to help re-charge. It keeps you knowing and understanding all of his principals and why they are worth doing.

Live like nobody else now, so you can live like nobody else later. Those words are true.

short+sassy · July 2015

Admittedly, I'm not a Dave Ramsey follower, though I do like his snowball method for paying debt.

Certainly the bare bones DR will get you out of debt faster but, if your H is uncomfortable with your savings level, maybe bare bones is not quite the way to go for you all. Decide together what savings level you all are comfortable with and in what timeframe and then adjust your payouts accordingly.

I'm also with a lot of the other PPs in regards to your mortgage. Since you just bought your house last year, I'm assuming you have a very low rate. That is cheap money. Max out what you can put toward retirement (if you don't already do that) then build a fat, cushy 6-month e-fund. Then I would recommend to maximize your return on cash by investing in mutual funds/stocks. But if you all would prefer the security of paying off your mortgage first, that is certainly an amazing goal also...just keep in mind you will only be saving the interest amount of your loan each year for that money versus probably making more than that with other investment choices.

vlagrl29 · July 2015

als1982 said:

personally I would get a 3 month emergency fund and then aggressively pay off your bad debt loans like credit cards and then focus on your good debt like house and school loans. Yes I believe there is good debt
Do know there is an income threshold at which student loan interest paid is no longer deductible. (I believe right now that point is $160,000 for couples filing jointly.) At that point, student loan debt offers no benefit and we consider it the same as any other consumer debt owed.

woah that's a lot of interest! I see your point there.

RosieC18 · July 2015

vlagrl29 said:

als1982 said:

vlagrl29 said:
personally I would get a 3 month emergency fund and then aggressively pay off your bad debt loans like credit cards and then focus on your good debt like house and school loans. Yes I believe there is good debt
Do know there is an income threshold at which student loan interest paid is no longer deductible. (I believe right now that point is $160,000 for couples filing jointly.) At that point, student loan debt offers no benefit and we consider it the same as any other consumer debt owed.

woah that's a lot of interest! I see your point there.

We were not aware of that income cap and ended up with a surprise come tax time this year and we couldn't deduct any of it. Obviously we're very lucky to make more than $160k/year, but I wish we'd planned better.

als1982 · July 2015

RosieC18 said:

vlagrl29 said:

als1982 said:

vlagrl29 said:
personally I would get a 3 month emergency fund and then aggressively pay off your bad debt loans like credit cards and then focus on your good debt like house and school loans. Yes I believe there is good debt
Do know there is an income threshold at which student loan interest paid is no longer deductible. (I believe right now that point is $160,000 for couples filing jointly.) At that point, student loan debt offers no benefit and we consider it the same as any other consumer debt owed.

woah that's a lot of interest! I see your point there.

We were not aware of that income cap and ended up with a surprise come tax time this year and we couldn't deduct any of it. Obviously we're very lucky to make more than $160k/year, but I wish we'd planned better.

Yes! This is definitely what lit the fire under us to get rid of it!!

KatieCutie05 · July 2015

Im an avid dave ramsey follower....

However /i so think the numbers can be adjusted slightly. The point of the 1k efund is to catch your slack to avoid going into debt. while at the same time keeping it low enough so you can get out of debt as fast as possible. This is only until your non mortgage debt is paid off. you should have 3-6 months and be contributing 15% to retirement while your working on paying off the house. Baby step 2 is also only meant to take 3 years so if its much longer then at that point you woulld consider upping your ef and retirement a bit

bekt14 · July 2015

Thanks for all the advice. Since we already have $3k in savings, I guess we are doing good in that area, so we should focus on debt.

Basically, I have $16k in student loans- which are my highest interest rates (above 6%). That's what we are currently focused on.

I also have a car loan for $16k, but it's a lower rate.

The mortgage is $190k at a very low rate.

We are currently maxing out our retirement because both our companies match up to 6%, but we wouldn't get that match if we stopped contributing (which is basically lost money). So, I don't think we will stop that.

Both our jobs are pretty secure, so I'm not too afraid of one of us losing a job. My biggest worry would be some kind of car accident, house fire, or something unexpected that would cause us to pay out our deductibles.

We are also selling unneeded items in our home (through facebook garage sales) and finding every other means to make some extra money on the side. But I'm estimating that we could pay it all off in about 6-7 years if we really work hard on the debt. That's a really long time, so I'm having trouble seeing a light at the end of the tunnel.

simplyelise · July 2015

Your non-mortgage debt is 32k and you have $4000 a month to throw at it, so you should be debt free except for the house in like 9 months.

If you want to follow DR, at that point you would save up to 6 months of expenses. Since you're already contributing to retirement, you can keep that or you can up retirement even more. After you pay off the non-mortgage debt, you can make different decisions about the rate you want to pay off the mortgage. You can still do $3000 a month towards mortgage and $1000 to mutual funds (above the 6 month e-fund) if you'd like to beef up savings.

As far as being worried about paying out your deductibles, could you not cashflow those pretty easily at your income level? If you have an emergency over 3k in a month, just pay the minimums on the loans that month and use whats left from your regular $4000 payment to cashflow the emergency. You'll be debt free (except for house) in less than a year, so it's not a concern for very long.

brij2006 · July 2015

Focus on the smallest debt first, no matter the interest rate. It helps to build momentum and keep you going.

The 6-7 years includes your house. That's amazing!! And if you ever listen to DR's show, he says that 7 years is the average for people who do the whole plan and pay off their house. It may seem like a long time from now, but break it down. How many years (or months) until the student loans are gone? Then the car? Don't bundle the mortgage into that. That isn't part of baby step #2.

So you have $32,000 in debt. That is easily something you can take care of by living on a budget and putting extra penny toward it. When we sat down and figured ours up, we realized that every extra $100/month we added toward the debt, it cut off 1 month. That's where it helped our intensity. We worked like crazy, and budgeted with intention.

Once the non-mortgage debt is paid off, that's when you focus on building up a 3-6 month emergency fund. So no, you aren't going 6-7 years with only $3,000 in your emergency fund. If it will only take you 12 months to pay off the $32,000 in debt, then that's only 12 months that you are living with the smaller emergency fund.

I know it's frowned upon in here, but it works and I'm going to mention it. Figure up how much of a difference it will make to stop your retirement investments and chuck that money toward the debt. Will it cut off 3 months? 6 months? Take a look and see. He does not want you stopping investments in order to pay off your house, nor does he want you stopping them for more than 2-3 years when paying off everything else besides your mortgage. But if you can temporarily stop them, and it means you are debt free (everything but the house) within 6-9 months, then do it. After that, you save up the 3-6 months of expenses for an emergency fund, then start back up and put 15% toward retirement (not counting your employers match, that's just a bonus).

strickland8052 · July 2015

Sounds like you have a good plan! I think it is very wise to at least keep contributing up to the employer's match. The employer match is basically like getting a 6% pay raise, so I wouldn't stop that just for the sake of being debt free sooner.

jtmh2012 · July 2015

strickland8052 said:

Sounds like you have a good plan! I think it is very wise to at least keep contributing up to the employer's match. The employer match is basically like getting a 6% pay raise, so I wouldn't stop that just for the sake of being debt free sooner.

Agreed. The advantage to retirement contributions is time. You can never get that time back. Also, even if you upped your contributions to 15% to "make up for it", you will never get back the employer match that you missed out on.

This is why cutting retirement contributions isn't popular around here....

MissKittyDanger · August 2015

Hey I'm new here, but as someone who works with people who have debt I would suggest paying off your debt first then save. Once debt (minus house) is paid, you credit rating will look great so you may have the advantage of talking to a financial adviser to get a better rate. That could help lower payments so if you want to pay more then you'll put a larger dent into your mortgage pay off

Which comes first? Paying off Debt or Saving?

Re: Which comes first? Paying off Debt or Saving?

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