Continue saving or increase debt repayment?

bmo88 · November 2015

Figured it would be worth a discussion. I have brought up other related situations and am curious to hear thoughts now that our e-fund situation has changed a bit.

We are on a somewhat aggressive debt repayment plan to pay off $66,000 (car, student and 2nd mortgage debt) in 3 years. We are about 15 months in and have paid off $26,000 in debt so far. Our debts are:

Car loan: $4,100 @ .09%
Student loan: $15,200 @ 6.8%
2nd Mortgage: $20,700 interest only @ 5.99%

Currently, we pay about $1,800 a month toward the debts, even though the minimums are only $692. While paying off our debt, we have continued to save money for our e-fund at about $600 a month. We have $16,500 in savings, which is 4.5 months expenses. Our goal is between 6-8 months expenses at some point. We also save for retirement at 18% of our incomes and do not plan to adjust that.

My question is, at this point, would you stop saving money in the e-fund or lower the monthly contribution significantly to accelerate pay off or continue saving in the e-fund until 6 months is met?

AprilZ81 · November 2015

I'm not super debt adverse so keep that in mind with my response.

I would slow down your savings rate (but not stop it) while you pay down some of the debt. Since your car payment is so very low I would continue to pay the minimum on that and throw your money at your student loan and mortgage.

vlagrl29 · November 2015

I think your savings is plenty - I would pay more off in debt.

lbonga1 · November 2015

I also think your savings is plenty. If your ran into an issue where you had to blow through the $16,500 that you already have, you could always cut the debt payments to the minimums temporarily. I can't image that'd be very likely, though. I'd focus on the student loans and mortgage. After that I'd continue to save. Putting extra toward the car wouldn't be worth it because you could earn more by just putting the money in a high interest savings account or CD.

Nat009 · November 2015

Assuming that you don't have risky job security, I agree with the other posters and would put more money towards your student loan. If you need to start pulling from your efund, you could easily cut back on your debt repayments to refund. Great job staying on track!!

bmo88 · November 2015

We both work at the same startup organization that is in it's 7 year. It is fairly stable and I am the Executive Director (in my first 6 months, though I have been at it for 4 years), but it's still not super stable. So having the e-fund definitely provides some security. I am thinking about lowering our savings to $200 a month and putting the remaining $400 toward debt. That would cut off a few months in the end.

CuriousKiddosMama · November 2015

I would stop the saving s and throw that extra at the debt every month. You have a pretty healthy e fund, and this will clear your debts sooner. When you are finished paying off the debts then you can increase your e fund to the number of months you want it at.

als1982 · November 2015

I would stop adding to savings and put the entire $600 toward debt.

JoanE2012 · November 2015

I would continue saving to 6 months and redirect any extra payments from the car payment to the student loan and 2nd mortgage. I like peace of mind though from a healthy emergency savings and would be willing to delay the debt payment payoff a few months to achieve that.

kmurphy2131 · November 2015

I'm potentially a little extreme. I won't say I am pro-debt because that sounds weird but I think that prioritizing savings is more important that paying off debt. Exception would probably be consumer debt. I think that savings is so so so important. Especially because you work at the same company - what if something happens to the company? I would get a 6-8 month e-fund then prioritize debt. I'm biased by seeing family job loss & family loss of income due to illness - both completely unexpected.

If you are paying extra towards debt I wouldn't add it to the car loan, the interest is so low anyway.

hoffse · November 2015

With both of you at the same start-up, I would absolutely get the e-fund up before paying a penny more to debt.

You guys are at higher risk for job loss being at a start-up. And being at the SAME start-up means that if one of you lost your job, the other is likely to lose his/her job at the same time. That's a really unusual situation, and that would be the #1 consideration driving all of my decision-making if I was in your position.

I would actually cease the extra debt payments completely until I had at least 8 months in savings. And in that specific situation, I would probably want a year of cash savings before paying anything more than minimums on your debt.

simplyelise · November 2015

I would definitely do more at the debt. I didn't realize before when you'd mentioned debt payoff that you had an interest only 2nd mortgage - was that as part of a mortgage scheme to not have to pay mortgage?

Even though we're doing Dave Ramsey, I am not 100% anti debt in some situations. I totally think it can be a smart decision and see how some people here use it responsibly. But unlike some PPs, I still consider car loans consumer debt. And the interest-only 2nd mortgage is not something I'd be comfortable with. So with over 16k in the bank, I would for sure move to a more aggressive debt payoff. Especially since you're still saving a ton right now towards retirement.

ETA- Meant PMI not mortgage lol

bmo88 · November 2015

@simplyelise We got a second mortgage instead of paying PMI because it saved us money. So we got a 80/10/10 loan. We put down 10%, got a 10% loan and an 80% loan. We are on track to pay that 2nd mortgage off within 3 years of getting it, meaning we will only pay $2,400 in interest, compared to $7,000 in PMI.

bmo88 · November 2015

@hoffse Though in our 7th year, I guess I would say it's moving toward a more stable org. It is a school with 800 students and a great track record for fundraising (with multiple year commitments). So yes, there is risk, but less risk than a traditional business start up.

dragonstarjk · November 2015

I would keep doing what you are doing until your savings is where you want it to be. You are already paying extra to your debts. Unless you are paying extra to the car payment, then I would only pay the minimum on that while paying the higher interest items. At .09% there is no real reason to be in a hurry to pay that off.

brij2006 · November 2015

I would put the $600/month toward the debt, and work smallest to largest.

short+sassy · December 2015

I would continue what you all are doing until you hit your 6-month e-fund goal. Then start putting the extra $600/month toward either the 2nd home loan or SLs.

Personally, I wouldn't be in any hurry to pay the car off because the IR is only .09%. I'd put money toward the principle on my main mortgage (assuming the other two loans are paid off) before I'd pay the car off.

Continue saving or increase debt repayment?

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