It’s an epic struggle of competing financial goals. In one corner you have the burden of debt. Whether it’s credit cards, auto loans, student loans, or even a mortgage, it’s money that eventually has to be repaid. Unless you’re fortunate enough to have no debt or only a mortgage, debt weighs on you and takes money away from other things. And in the other corner you have saving money. Regardless of your debt situation, everybody needs to save money. It could be to build an emergency fund, a down payment on a house, retirement, or even a college education. Whatever it is, it takes time and discipline.
This is where the problem lies. If you have both debt and a need to save money, how do you prioritize? Some people will pay off debt at all costs before saving a penny. Others will be fine getting by with minimum payments while dumping as much money into savings or investments as possible. While others try to do a little bit of both. That’s why the poll today asks how you view this subject.
For me personally, I’m a bit of a hybrid. I hate debt and want to make sure that revolving high-interest debt receives top priority, but at the same time I don’t feel that should completely take away from savings. As important paying off debt is, you still need to have a liquid safety net set aside and you can’t ignore long-term savings such as retirement completely. Time is also money, and every year you don’t put money aside is a year lost. So, I think it’s important to have a plan that allows you to structure your cash flow that will pay off the high-interest debt in a short amount of time while still maintaining the minimum debt payments on everything else, and still saving some money each month towards your emergency savings if you don’t have one, and contribute at least something to your retirement accounts. At the very least, enough to get any employer match in a 401(k) if you have one.
But that’s just me. Where do you stand, and why?
Author: Jeremy Vohwinkle
My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.
I Pay the minimum on debt while putting everything else toward savings. I have two student loans(5K left to pay) with interest rates 1% and 2,5%. And big part of savings goes at the moment to finance my equity on upcoming business. During next year I will be "proud owner" of mortage which will go also on minimum payment for at least 5 or 10 years. I like to have most of my saved money somewhere which allow me to spend/invest those where most "needed" (fx. business or debts only if really really needed) if I use those for debts I can't use sweet opportunitys to invest.
It would be good if we could calculate how much we will safe by settling our debt sooner. If the interest on morgage is low, you can use some of your spare cash to invest. It is a case or knowing where to place your cash first.
Once your investment has brought profit, you can then put the money into settling the debt. One of the most dangerous and subtle debt is the Credit card debt.
However, you can always sleep better when you know you have settled your debts.
This is a GREAT question; people make the mistake of thinking that there is GOOD DEBT (typically, investment debt) and BAD DEBT (typically, consumer debt) ... but, this is only true BEFORE YOU TAKE ON THE DEBT.
Once you are in debt, then there is only CHEAP DEBT and EXPENSIVE DEBT. Put simply, pay down your expensive debt, until only the single digit ones (on an after tax basis) are left, THEN start investing.
This goes against the 'pay down all debt' theories, but works both logically and practically. I've systemized it (for free), here: http://7million7years.com/2008/12/09/the-cash-cascade-tm/
My last semester in my PhD program, I put several thousand dollars of my student loan disbursement in a savings account as an emergency fund. So I didn't have to save that from scratch. I spent a little of it when looking for a job but had $4K left when I found one, and I haven't touched that.
When I started working, I had about $16K in credit card debt and am now down to less than $1K (after just over 2 years). I work at a university so I'm required to contribute enough to my 403(b) to get the match, though they don't actually deposit the matching funds in unless/until I work here for 3 years total.
Once I pay off my credit cards entirely (which should be before the end of this year!) there are a few things that I have been putting off buying that I plan to get, but then I'll concentrate on the $6K or so of student loans that are at 6.8% interest. Once that's knocked out (probably another year), I will be able to change the repayment plan on the bulk of my student loans (about $92K) from the graduated payment plan (currently I'm interest only) to the fixed payment plan. Then I can open a RothIRA.
Luckily, the only debt I have is my mortgage. I'd love to pay it down as quickly as possible, but I've got other things to save for, such as retirement (finally maxed out my 401(k)), some home improvements, and replenishing my emergency account after some car repairs and dental work.