In this economy, which would be better? Pay off debt (loans, credit cards, etc.) or save 3-6 months worth of living expenses? -Megan
This is a great question, and it evokes my favorite response: it depends :).
Generally, I would recommend that you first build up a little savings for an emergency fund just in case emergencies happen when you are paying down consumer debt. Then, in most normal circumstances, I would say it is best to pay off your revolving debt and other liabilities before making substantial contributions to your savings, emergency fund or otherwise. This is because you will have so much more momentum built up after paying off your debts and more money to work with than you would if you were trying to save and make minimum payments at the same time to keep from falling behind and going into default.
After you’ve paid off your consumer debt, put the money that was going out in the form of minimum or extra monthly payments towards beefing up your savings. Use the same focused intensity you did to pay off your debt to also build up your savings.
Now for the “depends” part: if there is a major event looming in the not too distant future, I would not work on reducing my balances until I had enough to cover that event or good insurance (coupled with a bigger savings acount) that would cover it. If there was a good possibility you are going to be losing your job or if you are going to be having a baby in the next six months, if you know you might not get severance pay or you don’t have maternity coverage, than it would be best to save up for possible unemployment or to pay for your baby’s delivery. You’ll want to consider possible upcoming “major events” on a case-by-case basis and then decide what you feel most comfortable with in your own unique situation.
Notice that I never said anything about the economy? The reason is that it is only your home economy that matters when making this decision. Each home economy is going to be different and one person’s priorities or circumstances may not be the same as another’s. Some people are going gang busters in “this” economy and others are really struggling.
Evaluate your own situation, get sound advice and move forward with a plan. It is when people don’t have a sound plan and stick to it that they get burned.
I would love to hear what you would do. Would you go ahead and beef up the emergency fund or get down and pay off debt?
Jesse Paine is a licensed attorney who owns his own law firm. He’s married to Crystal and is the numbers nerd of the MoneySavingMom.com team! If you have a question you’d like him to answer in a future column, you can submit it here.
The content of this column intended for informational use only and is not to be construed as providing legal, investing, accounting or other professional advice. Your situation is factually specific and you should accordingly seek qualified professional counsel concerning your specific legal, investing or accounting needs.
Dani says
With having lots of changes throughout the last 4 years of my life between having two kids, moving multiple times, job changes and the opportunity to go back to school, I say emergency fund first!!!! I learned this through experience. My first reaction to my fast changing life was just keep paying down debt as quick as I could. Well it never failed, something always came up! I would have to charge it back to my card and felt like I had to keep starting over. I finally decided to pay my credit card payment (I have always tried to pay $20 above my minimum so thats how I left it) and use extra money for savings. Within about 6 months, I was able to save one months worth of bills (in this six months I also had my second child and I didn’t have maternity leave, something I had saved for already). Now it’s a year and a half later and I still have my emergency money in my account, my creadit card paid down, savings accounts for both kids and a new savings account for our next home. Plus a $36,000 (I was 19 and dumb when I bought it lol) vehicle that will be paid off in about 6 months, quicker if possible!! I’m not sure why, but saving for my emergency fund first benefitted me so much!!! Our next goal, open retirement accounts by the time I turn 25 (6 months away) and start our savings account for 6 months worth of expenses!! & Of course, I always help someone in need! 🙂
Danielle says
I personally would pay off all debt first, unless I knew for sure there was something coming up. Especially if the debt has a high interest rate. If you don’t foresee anything in the near future, you will save money faster if you can pay less interest on your debt. I always have a back up credit card if an unforseeable event comes up while I’m are paying off debt.
Suzanne H says
I agree with the concept of your “home economy” although you can’t say the greater economy isn’t a factor. We are all pretty accustomed to paying about $2/gallon for gas; now it’s twice that – huge deal for people on an already tight budget. Add to that, food price increases, heating price increases, etc. and the country’s economy is definitely a huge factor in all of our home economies. I do agree with paying off debt as soon as possible for the reason Jesse said – you will have more $ to save later when not trying to pay minimum payments and save. But also, you will have more $ now and later b/c you will not be paying as much in interest. Interest is like cancer – it just eats away at you and is money spent on nothing! My husband and I did the following order: paid cash for wedding, rings, honeymoon, etc., paid off my student loans, paid off his car, bought me a new car and paid it off, built up an emergency fund, saved for our son’s college (we put away a set amount at 1 year old so we are hoping it grows enough over the 17 year time horizon); started paying down the principal on our house and started tackling home projects/maintenance and now, hopefully, this month, will be making our final payment on our mortgage. It will be so nice to be debt (and interest) free. We have not done any retirement savings for several years now while trying to pay off our house. The thought being the economy has not presented too many investment opportunities so we opted to pay ourselves the 4% interest instead of trying to get stocks/bonds/etc. to give us that return. We plan to build up our savings again (using it all to pay off house) and then max out our 401ks each year.
Missy June says
This time last year, my spouse moved out and our divorce was final by the end of 2010. We had combined debt and I was facing the cost of attorney fees and establishing a home with myself and three children on my own, with child support. My strategy:
– I was gifted $1,500 to help. I put this immediately into a savings fund for emergency needs. I went into an emergency budget mode, only spending what was absolutely necessary and used a credit card for legal bills, medical needs and Christmas. By operating on this skeleton budget, I was able to add to my savings account. In February of 2011 (with the help of a tax return) I was able to pay off all debt. I now have a limited savings account and will get to pay cash for a vacation with my three little ones this summer.
Debt is not always the evil-eyed beast if used wisely through challenging circumstances. Just be sure there is a plan in place to pay it off and you will be in control of it, and not the other way around.
amy@twobgardening says
I agree!!! Pay off the debt first. I have been trying to get rid of these credit cards since I was 23 years old, now 35. I am down to only one and should have that paid off within the next 12 months. My goal is to have my house paid off in 5-7 years after that. You and your husbands savings plan has really inspired me to save. Thank you so much! 🙂
Sue says
This discussion is very interesting–I’m at the other end–older than you guys. We never had Dave Ramseys approach to follow. We are 55-with no debt (own our house because of sweat equity) own our cars, payed for our 4 children’s college education, tried to save as much as we could on a small income, so we have little expenses now and some savings, But my husband owns his own business-Electical construction which where we live there is NO work. So the economy is definitely affecting us! We just pray !
Antoinette says
We have taken a three-prong approach:
1. we have increased our surplusses and made investments in long-term resources for our family (for physical emergenies as well as job emergencies like getting laid off -which I recently was);
2. we have focused on getting rid of all remaining debt except for student loans (husband still going to school) and mortgage); and
3. we are “beefing” up our mortgage and emergency savings accounts.
I tend to agree that an emergency fund is important – it has saved us from incurring major “extra” debt and from having more stress than necessary when “life happens”.
We are NOT following through on the remodel of our kitchen…we are just going to piece together what we had torn apart prior to my being laid off :-). We are still trying to discipline our spending. We are following the counsel to be self-sufficient and to be free from the tangles of debt and all the trappings that the world says we “need”. There are other things I’d like to cut to save extra money…but then I wouldn’t be able to browse wonderful websites like this ;-).
Lana says
I would make any decision a matter of prayer first and always be sure your decision is based on Biblical principles.
Heather says
What exactly are the Biblical principles that should guide these decisions, in your opinion?
Lana says
I believe Dave Ramsey’s materials would give all the of the answers to that but I never see anyone talking about giving back to God first. No matter how tight money has been at our house at times with raising 5 children we always tithed. We were always blessed in return as the Bible says. We just went through 9 months of unemployment and we never even considered not giving from our unemployment checks. We also continued to give to those in need. I think this may have blessed our children more than anyone else, because they saw our faith in action. Somehow after 9 months of living off our savings account we had double what we started in savings by the time my husband got a new job. I totally cannot explain this and I am the one who handles the money at our house.
Number one I would make financial decisions a matter of prayer. Secondly I would not allocate any money unless I was tithing in accordance to the Bible, and there are many opinions on this. This has been the way I have handled our finances and we cannot contain the blessings poured out on us at times.
Crystal says
We definitely have seen the blessings of being faithful to tithe — even finances are tight. I’ve written about that here in the past:
https://moneysavingmom.com/2010/09/the-blessings-of-giving.html
Guest says
We used money we had saved to pay off our car ($15K) which felt awesome at the time. Then the reality set in that we had used our liquid savings to pay off an illiquid asset. I won’t say that I regret that we paid off the car but I will say that I would have felt much more at peace day to day if we had kept the money in an emergency fund and paid off the car later.
It’s ultimately worked out fine for us but would have been bad if we had lost our jobs or had an emergency beyond the $1K baby fund.
Cricket@ Thrifty Texas Penny says
Emergency fund first! (unless your debt is very small) Without an emergency fund you put yourself at a huge risk of taking on even more debt in the case of ….you guessed it….an emergency. A little over a year ago we were expecting our daughter, I was planning to resign from teaching, and we were planning to move to another state 6 weeks after our daughter was born. Since we had 9 months to prepare (and still had 2 salaries), we ended up funding an emergency fund with about 9 months of expenses by the time she was born.
Good thing we had that emergency fund, because our house didn’t sell so we paid rent and a mortgage for 4 months. After we rented our old house out we decided to go ahead and buy a new one instead of rent (buying was significantly cheaper than renting) 1 week after we moved into our new house, our renters broke their lease and we just ended another 2 month period of making 2 house payments on one salary. I shudder just thinking of some people charging gas each month knowing that instead of $3.79 a gallon it would be more like $5 or $6 a gallon with all the interest.
Long story short, for our family- emergency fund first. 🙂
Andrea Q says
Gas will be $5 for everyone pretty soon!
TNK says
I will respectfully disagree 100% with many of you here. Set up the emergency fund FIRST. I would not concern myself with contributing extra payments so I can pay off unsecured debts like credit cards until I was sure I had myself covered first. The point of having emergency money is to cover yourself in case the worst happened. Which is more important, food, clothing, shelter or knowing you made an extra payment on a credit card? That emergency fund is designed to get you through the necessities should things go really bad. If everything got bad enough, I can guarantee you that those credit card bills would seem moot when you can’t even put food on the table, pay for heat, rent, etc.
Camille says
I love Dave Ramsey, but as Jesse points out, every situation is different. For us, $1,000 in an emergency savings did not feel like enough. We own a home and have 3 kids so we set a goal of $3,000 (because $1,000 wouldn’t replace the AC or the water heater and a hospital stay would cost us around $900 with insurance!). We also have an 11 year old vehicle and it is the only one we have. We know it will need replacing soon so we are currently throwing all extra income in to a savings account for a new car instead of paying extra on our student loans (the only non-mortgage debt we have). As Jesse stated — it depends! 🙂
Sandra Lee says
I am blessed financially so, I have always been able to pay off my credit cards when the bills came due. When I worked I had a savings equal to 12 months of expenses, some of which I held in an interest earning checking account, so as to have ready available funds. The remainder was held in higher yielding interest bearing accounts. I can’t imagine anything less in today’s economy with it taking the average person 8 months to find a job.
Lana says
I really don’t think that 8 months to find a job is accurate. My husband was unemployed for 9 months. Two neighbors unemployed, one 14 months and back to work now but our next door neighbor is coming up on 3 years, We do not live in a economically depressed area!
Emily says
I agree. I think the average time for unemployment is a bit longer than 8 months. I recommended Suze Orman’s new book “The Money Class” in an earlier comment. She states the actual statistic either in her book or I’ve heard her state it on her TV show. Anyway, from what I can remember, it is longer than 8 months…..I just can’t remember the exact number.
Sandra Lee says
The 8 month average to find a job is a statistic I read in the Wall Street Journal.
Suze Orman is the one who suggests having equivelant to 8 months expenses in an emergency fund savings.
http://www.cnbc.com/id/36599304/Suze_How_Safe_Is_Your_Emergency_Fund
Emily says
Yes, I know Suze recommends that – I’m a big fan of hers. If I remember correctly, she used to recommend having 6 months of living expenses in your emergency fund; however, in today’s economy with today’s unemployment highs, she has bumped that up to 8 months because of how long people are remaining unemployed. I do believe the average number of months people are unemployed today is a bit more than 8 months.
Sandra Lee says
I’m sorry to hear you know of so many who are having difficulty finding a job. Best wishes to all.
Maureen @ Break Through Your Money BS says
I know people here in Massachusetts where are unemployment is not as bad as other parts of the country that have been out of work for over a year and some even longer. My feeling is you need more than 6-8 months for an emergency. I have 18 months for an emergency and I sometimes think in these economic times it might not be enough.
Sandra Lee says
That’s why I had 12 months.
Sandra Lee says
Emily,
Suze Orman bumped the recommendation to 8 months years ago. I am truly sorry for those who are finding it exceedingly difficult to find employment. As I said, it was the Wall Street Journal who estimated it to be an 8 month average for a person to find a job. You are misinterrpreting this to be my opnion rather than a researched statistic.
Liz @ Wonder Woman I'm Not says
I agree with these recommendations. Our original goal for the year was to add about three more months to our emergency savings as well as pay down as much debt as we can. Since then I’ve been putting more money into debt repayment and holding off on adding to the emergency fund. We do have more than $1,000 in an emergency fund and we also have some credit cards with no balances that we could pull out if we had to. However, if I thought either one of us were going to lose our jobs soon I would be adding more to the emergency fund. Crossing my fingers that doesn’t happen 🙂
Nora@ The Dollar Hollering Homemaker says
Good advice. I would add that you should make sure that you have enough saved for your non regular expenses. Sometimes people get so focused on debt repayment that they forget their electric bill increases in the summer or Christmas expenses, etc.
We have a few funds that make up our emergency fund. We keep a car fund, pet fund, house fund, medical and general emergency fund. We don’t have as much in our general emergency fund (which we would use in case of job loss) but we do keep a good amount in other funds where we are most likely to have smaller emergencies where we would need those funds.
Amy says
We love the separate funds for separate needs!! Ing Direct makes it easy to save and lets you open as many nicknamed accounts as you need.
Nora@ The Dollar Hollering Homemaker says
Yes, ING is wonderful!
Lisa M says
We are baby-stepping our way through to Financial Peace. Just today we sent in our last debt payment – everything is paid off but the house! I physically felt a weight come off my shoulders today! Now onto 6+ months of emergency savings! It really is the best feeling!
Lisa says
A common sense approach, definitely, but not necessarily an easy one. My husband and I have paid off all of our debt, except for my student loans, thanks in part to Dave Ramsey’s approach and this website. We have also been able to save $3000 in a savings account but have pretty much stalled out. We are renters, have 4 children, no retirement or children’s college accounts, and there’s so much we “want” to do, like buy a house. I’m a SAHM and my husband has a great job that pays well, but he absolutely hates it and we live in one of the most expensive parts of the country. Daily, I watch as the prices on everything rise steadily, except for houses, and I’m “afraid” to make any kind of move, not wanting to upset the scales. This stagnant life of ours is really starting to drive me crazy and although I do realize I should work harder on being content, I can’t seem to get past this stage…
Maureen @ Break Through Your Money BS says
Hi Lisa:
What is the most frustrating aspect of your situation? That you can’t buy a home or is it more a broad based issue of not being able to do anything at all? Does this situation remind you of anything from your past that you felt frustrated with?
The reason I ask is that the way we do money is the way we do everything in life and your money situation maybe reflecting back to you other areas in your life and causing you even greater aggravation.
Why have you stalled out? Did you just loose the oomph to keep saving? Or did you revert back to old habits that are standing in your way of moving forward with your financial plan?
Money isn’t a set it and forget it relationship. Often times I read the advice that people give and it all sounds wonderful but money rears its ugly head psychologically for many and it takes alot of work to change your thinking so that you can truly gain financial freedom.
sabrina@theunlikelyhomemaker says
Maybe you and your husband just need to set a goal. My husband and I over the years have made money (good money) and spent it all. Accrued credit card debt, paid it off, accrued some more, paid it off, made more money, spent it….Finally, when we were litterally living paycheck to paycheck, we took Dave Ramseys class. I wrote down our spendings, and realized that we spent every cent that I made…on stuff. After re-prioritizing, I was able to quit my job, and we managed to start a savings account. It’s still tough, and more money would be better, but we are making it work. We set some financial goals, and are sticking to our envelope budgetting very well in order to meet our goals. Some are small (like, we saved enough cash to pay for gas for a round trip road trip from California to Oklahoma to visit family), we want to save $2,000 for each of our kids (we have two), we want to be able to replace a battery in our car if need be, we want to (a loooong ways away) go back to europe when we can pay cash again (did it once already), and, we want to put at least 50% down on a house. All of these have helped us focus more on our spending, and our income. Again, it’s not easy, and we aren’t to the point yet of being able to actually put money towards most of these, but this is what we are working one.
Maureen @ Break Through Your Money BS says
Sabrina you highlight my point so nicely as you describe that make and spend cycle. I knew that cycle very well until I made a conscious choice to change my mindset and habits. But it’s a long road as you say. Good luck!
sabrina@theunlikelyhomemaker says
We are doing the Baby Steps too, but are switching 2 and 3. This is because as of about 3 months ago, I became a sahm, and my husband has not been getting a full 40 hours per week. We are building up our emergency fund to 3-6 months of living expenses, then we will pay down debt. During the weeks where my husband gets less than what we need for our bills (we have no extras, no loans, minimum cable, low grocery budget), we will pull from our emergency fund to cover what his check does not. At times where we have to do this, in order to make sure that we don’t use up our emergency fund, we cut our budget to more bare bones (no money in the birthday envelope, entertainment, my personal cash, clothing, and only 50% of my gas money gets taken out). We have had to do this twice, but at least we paid the bills! If we had stopped our emergency fund after Baby Step 1 and started paying down debt (we have collections 🙁 ) we would not have had the money for our necessities.
Angie says
Is there any way that you can make some money from home while being a SAHM?! I quit my job to stay home with our son (#2 is on the way…), and the Lord miraculously provided a babysitting job several days a week to help bring in some extra money. Have you considered doing some babysitting, running errands, doing some per diem work somewhere, something to help out. I also am an independent consultant for a home-based company, and I set my party schedule around what works for my family and our needs. It has worked wonderfully for us! I can be at home with our son during the day, but then a few evenings a month, I can go out and make some money (when it suits me…) and contribute to the family income. I am NOT suggesting at all that you go back to work, just maybe supplement a little bit. The good Lord knows that the desire of my heart is to be a SAHM and also have some financial freedom, and its been awesome seeing Him provide both of those for us! Blessings to you!
sabrina@theunlikelyhomemaker says
I can barely manage my home with my 2 year old and 8 month old, so babysitting is out :0) My husband’s schedule is very sparadic, so any sort of part time job it out…I do have small ways of bringing in extra money (or really just cutting some costs). I buy toiletries from amazon using gift cards from surveys and swagbucks. I do craigslist often for extra cash. I have recently started marketing some stuff my husband has built for my son (childrens picnic table, wood kitchen). I also have litterally no one that could watch the kids for me even for a short time, so that I can figure out how else to supplement my income :0) My husband was laid off a year and a half ago, and has been working with a friend (hence the irregular hours) but we are praying he gets the job he just took a test for.
Heather says
Is it possible for you to get a job and have your husband stay home with the kids for a little while? Honestly, that’s the situation my hubby and I would be in if we had kids right now. I make literally three times what he does, even when he’s working full time. As much as I’d love to stay home, my family needs me to work. It stinks but paying off the debt is worth it.
sabrina@theunlikelyhomemaker says
That sounds really great to me, since I’m not a great homemaker. But, my husband has way more earning potential than me! Even working the part time job that I recently quit, we weren’t exactly “making” money because if he had to leave work early so that I could go to work, we would be out more money than what I make (I only had 3 hr shifts, and made less than half of what his hourly is).
TNK says
This is exactly my point. Credit cards and other unsecured loans are NOT and will NEVER BE as important as you setting up a reserve to get you though times that present difficulty. I would also advocate making sure you have at the very least 3 months (but I would recommend 6-12 months) of food storage on hand as part of your emergency plan. It can make a HUGE difference in times of difficulty.
Just imagine if you had food on-hand that you could pull from and enough money on hand to get you through difficult times!!!
sabrina@theunlikelyhomemaker says
I agree. he emergency fund is most important, especially when you do not have a set salary, or set hours from week to week. If my husband and I both worked steady jobs, I would have no problems keeping to the reall Baby Steps. I do have a pantry in the garage where I make sure to keep things like tuna, peanut butter, pasta, soups and canned veggies (as well as stocking the freezer up with veggies and meat).
laura says
have you looked into demandstudios.com? They’re always hiring freelance writers and it’s a GREAT way to make money while staying home with the kids. That way you don’t need to hire a babysitter & can still contribute an income.
Renee says
Hang in there. God will always provide for what you need. I stay at home with my 2 year old and 11 month old. I do not have time to work at home and that is fine. Raising two kids so close together is enough. My husband income is not regular and some months there are more bills then money. When you have extra income save it for times when there is more bills then money. You are doing the best thing in the world taking care of your kids. This time is only for a season. Your husband will get a better job.
Katie says
I’m wondering what to do with my situation. Any advice would help.
My husband and I have 3 student loans, 2 car payments and our mortgage for our debt. The lowest loan balance is about $2900. The monthly payment is only $50. We have enough in savings to cover paying the balance on that loan, but we have some things for our house that I think we should do first. Our master bathroom doesn’t have a vent (so it gets moldy easily), and the tiled shower is sinking in a little. We also need new windows. Which should be tackled first, fixing things in our home or paying off debt?
Sherri says
Start with that bathroom! You don’t want mold to grow uncontrolled in your house- it could cause health problems for your family. And a sinking shower does not sound good- this could be a small problem that turns into a big problem if ignored. If you know someone who is knowledgeable about such things, have them take a look and give you their opinion. Maybe it’s no big deal, or maybe it’s a sign of trouble.
Bre says
I would say pay off your debt first (student loans and car loans), making sure to leave $1,000 in savings for emergencies. If you house still functions then try to make the best of it… use bleach to prevent mold from spreading as soon as you see it.
The amount you are paying on interest on the student loans and car payments on the life of those loans is thousands of dollars. The faster you have those paid off the faster you can get to your house remodel!!!
Amy says
You might find some inspiration in, yet again, Dave Ramsey’s Total Money Makeover. Thanks to Dave, we have changed our monthly budget a bit so that we are not neglecting the needs of our family and our home while we are at the same time tackling debt. Part of our monthly budget is a “Home Improvement” fund that we keep as a separate nicknamed savings account through Ing Direct. That way, we are constantly saving money so that we can address home improvement needs as they come up. You could consider fixing the bathroom right away with your savings, and then saving up for the new windows a little each month, all the while chipping away at your debt.
Diane says
I would leave the fixing up until you have less debt. If the repairs can be put off another few years…we have rust in our bathroom sink and it has bugged me for 2 years but I’m waiting until we’re debt free. If you “need” windows, are they just old or do you really really need them? I understand new ones have their advantages but with car payments and such, I really think you should go after those.
Andrea Q says
I would have someone inspect the bathroom and at least install a vent…mold is very unhealthy! The windows can wait while you pay off debt.
TNK says
Have you gotten any estimates on how much all those things are going to cost? Your windows can wait, use the cheap plastic kits you can find at any store. Replacing your windows is COSTLY and will run you much much more than $2900.
If you have enough money in your savings to leave you with the appropriate amount of money for emergencies, I would say pay off the loan. Allocate the $50 to another debt.
Have you set up a budget to include house maintenance? If not, do so. Get estimates on the repairs, and start putting the money into household maintenance account. When you get the cash, make the repairs.
What other sacrifices can you make? Less traveling, can you carpool, cut back on dining out, cut out other bills (cable, cell phone, phone, entertainment, etc.).
Becky says
Just a thought on one way to get by until you’re better able to take care of one of these repairs. While mold is a very serious issue, and I don’t know your situation, this does remind me of something my husband’s sweet grandpa would always call us out on. All bathrooms should have either a vent or a window. If there is no vent, the window should be open while you’re in the shower. Grandpa would insist we do this, even on a bitterly cold winter day (just ajar a bit). =)
kjs says
I’ve been there. We are debt free now, but we live in an old home. So when we were paying off our truck loan a couple of years ago, we had different repairs to the house we had to make. I mean, some things just have to be fixed!! My advice? Get handy! 🙂 You or your husband can install a vent. Read the instructions and go for it. You can get a vent rather cheaply. Now ask yourself if you are more embarrassed about your shower, or does it really need fixed? If you have a basement, look at the floor under the shower. How does it look? If it looks solid, feels solid it is probably okay. If it is wet, sagging, or you can slide a nail into the wood without a hammer, get it fixed! About the windows, I still have my “new” windows that the previous owner put in. Sometimes I wonder who made these windows and why they were even allowed to be sold. In other words, we need windows. So I get what you are saying. I don’t have new windows-I use the $6.00 plastic in the wintertime to cover them. It will cost A LOT to replace them and we are just going to wait. Try waiting a little longer and pay off that debt. I hope this helps. 🙂
Rebecca says
I agree that boosting savings first and then paying off debt is wise. If you have no money to fall back on for “what ifs”, any debt you have paid off will just get racked up again taking care of things that come up.
My husband and I both left full time jobs in 2008 to pursue graduate school. We both had part time jobs and funding from our academic departments so we didn’t have to pay for tuition & fees but brought home welfare sized paychecks for take-home pay. I took up side jobs – selling on ebay and amazon, etc. In Feb 2009 I was let go from my job when my department’s funding was cut by the state. I was too far along in my degree to just “give up” at this point, but couldn’t afford to continue full time. I’ve been going part time for the past year and should graduate this December. I *JUST* found another part-time job this April – 14 months later. The pay will be much less thanks to fewer hours and it is a longer commute, but I am hoping it will turn into something positive. In the last year I have had unexpected medical expenses arise that our student insurance would not cover, deaths in the family that required expensive airfare, and much more. While we are barely breaking even each month (and many months we don’t), having that cushion of cash built up thanks to our full time jobs pre-grad school has been a life saver.
My husband got a large scholarship for next year, which will make things more comfortable for us. Our plan is to pay off the remaining debt, max out our Roth IRA contributions for 2011, and sock away the rest of the money. It will be a nice burden lifted not having to pay those minimum payments anymore! Had we not had this opportunity, the extra income from my new part time job would have gone to savings since we’ve nearly depleted it in the last 3 years so that we have enough in savings for 6 months living expenses AND 1 semester worth of fees for husband.
Emily says
I would advise Megan to read Suze Orman’s newest book, just out this year, called “The Money Class”. She really explains quite well how we have to change the way we think and look at things in today’s economy. I do think that “this” economy matters, because in “this” economy, many people are unemployed and those that are without jobs are remaining unemployed for much longer than in the past or are forced to take much lower paying jobs than they have had in the past. It is crucial to have an emergency fund (of 8 months according to Suze’s advice) in place in case you are one of those unfortunate people who do lose their job or have to take a lower paying one. I do also think that paying down debt is important, and I think it is possible to pay down debt and contribute to emergency savings at the same time. In my opinion, having low interest debt such as student loan debt and low interest car payments is ok while you work at building up savings.
Emily says
Oops…..didn’t mean for this to be a reply to you Rebecca, but just a regular comment. Don’t know how that happened.
Heather says
I followed Dave Ramsey’s advice as well–he’s a genius! (ok, not exactly, he just puts common sense tactics on paper, but they work so well!). My husband and I are out of all debt except for our mortgage, and now have 4 months emergency savings. It is such a good feeling! Next step is to beef up our retirement. 😀
Amanda says
We followed Dave Ramsey’s plan with a bit of a twist. We put aside $1,000 before kicking it into gazelle mode on the debt, and then we paid off all debt except student loans for my husband’s MBA. Since it’s going to take us at least 2 years to pay off the student loans, it didn’t seem like a good idea to keep putting all that money towards debt without first setting aside 3-6 months’ expenses.
Jennifer says
I might add the only other debt we have IS the student loan but with such low interest we elected not to pay it off in lie of saving up for next car and paying down house. just our decision.
Jennifer says
I wonder how to others get the house paid off? between putting extra money from mt pt job into the things we need and need to pay, tithing and putting 10-15% of income to retirement we dont have much by the end of the month!
Heather says
Don’t give up! Every little bit helps, even what might seem like a tiny, throw-away amount. What motivated me was running a mortgage calculator (tons available online) that calculated how much faster we can pay off our mortgage (and how much interest we can save) by paying $X more toward the principal each month. Try running that calculation with a realistic amount (even if it’s $10!). I don’t know your situation but you might be surprised at the result. By paying an extra $200 a month, we can pay off our house 11 years sooner!
Kim says
I totally understand what you mean. For example, we aren’t making car payments anymore but were saving for the next one so there’s no extra money for the mortgage. But we are in such a better position overall. So we keep working the steps.
Sasha says
We are still on babystep two. But I think that Jesse is right it does depend on the situation. We don’t have any major planned expenses coming up so we are paying down our debt and just saving as we can but not focusing on that over our debt.
Sarah says
I agree with the part about saving at least some money before you tackle your debt. I have been trying to convince my husband of this and finally did and now we just made a huge $3000 payment on a credit card and are feeling awesome – and we have some savings in the bank too! I can’t wait to make more dents in our debt and pay it off once and for all. Good advice!
Rachel says
We are doing the baby steps as well! We are in baby step #2 for the 8th month now (more than halfway done paying off debt). Sometimes I get freaked out thinking how much is going toward debt and we are not saving it, but we just pray that this is the right direction and soon we will be done and can put the money toward our baby step #3!
Meredith says
Hi Rachel,
Just think of all the money you’ll be putting towards your saving when you’re done sending in the monthly payments. It’s liberating! Hang in there:)
Anna says
I am so glad someone asked this question! I have been wondering about this myself. There’s a possibility that both my husband and I will be losing our jobs (we work for the same company) within the next couple of months. We decided a few months ago to save up 6 months of living expenses, but I was wondering if it was really the way we should go (all of our debt is paid off except for 1 loan). I am happy to report that we just reached our savings goal, and now plan to move on to paying off the last of our debt.
Andrea Q says
I really agree with this: “Notice that I never said anything about the economy? The reason is that it is only your home economy that matters when making this decision.”
Heather says
I agree that it’s important to focus on your own home situation instead of the larger economy. But, unfortunately, the larger economy has big impacts on my home economy. I’m subject to being laid off from the military (won’t know until July whether I get to stay). If I get laid off, it will likely be 2-3 months before I can find a job making a salary even close to what I make now. My hubby (who relocated to be with me) is having a hard time finding a full time job because of the economy, too.
Vanessa says
We’re waiting on the military to make decisions, too, and it just stinks. Hang in there!
Amy says
Thank you for your military service. I pray that God will bless you and provide for you both!
Heather says
I agree also. There is never a perfect economy for everyone. Even in “boom times”, there are those who lose jobs, have medical catastrophes, etc. Although, of course you should think about the broader world outside your door and how it will affect you.
Naomi says
If I may suggest what I think Jesse meant by this comment:
I don’t think he meant that the larger economy has *no* effect on the home economy….rather, that in many cases it is not going to completely interrupt it.
Case in point: Here in IL, our income taxes have been raised by a LOT. Additionally, our family has not seen a pay raise in a few years (due to the greater economy). The result of this is that we are actually making less money now than we were before. You know what though? Even though we are making less, we are in fact *doing* more now than when we were making more before. It’s all about perspective and wisdom w/ handling our finances.
Add to all of this that I am a SAHM. There is little chance that we will truly receive a pay raise until hubs gets a new job. Despite that, as we focus on *our* economy rather than the larger economy, we can still fare well w/in our own household, no matter what is happening outside our front door.
Melissa says
We are facing this decision also because I am stepping away from my job to be a SAHM and my husband is finishing up his Ph.D. We are erring on the side of caution and saving as much as we can. Once my husband has a better job and there is a stable income coming in, we will focus on debt reduction.
Heather says
What a tough decision! I’d say if your job is steady or if you have two incomes, it’s better to pay down debt than grow your emergency fund to really high levels. Your money will be “earning” more by paying down a debt because the savings account interest will usually be very small in comparison to the interest rate on the debt you’d be paying off. So, you’re getting a bigger bang for your buck by paying down that 7% car loan than by parking the money in a savings account at .5% interest.
Beth T says
Yep, I agree with this and I think 7% is a modest number… especially when a lot of people pay 20%+ for credit card debt.
Jennifer says
We are paying off our 2 vehicles this year (yay) thanks to a second job of mine. We are also adding to our savings (currently 2 mo worth) to 3 mo worth because thankfully I have a stable job. Next year we plan to start saving up cash for my next vehicle and hopefully after 3 years we can save 20-25,000 enabling us to almost pay cash for a new car to keep for the next 10+ years! After all that we plan to start paying down the house.
Meredith says
We’re ‘baby-steppers’ too! We’re on Step # 3 and highly recommend Dave’s plan. I do like what Jessie said about considering your “home economy.” Great way to think about it.
I believe Dave would agree with the idea of stockpiling money if you have an event coming up, if not, follow his baby steps.
Amy says
I like Dave Ramsey’s baby steps solution. First, save up a $1000 emergency fund. Second, pay off all debts except mortgage. Third, beef up emergency fund to equal 2 or 3 months income. I don’t remember what’s after that! We just finished Step 2 (debt free except for mortgage) and are currently building our emergency fund. Dave Ramsey’s Total Money Makeover is definitely worth the read!
Rita says
#4 is to save for retirement. 🙂
I was actually going to give the same advice! We’ve been on Dave’s plan for a year now (we finished Financial Peace University before my little one was born in February).
Dave recommends that if you have something coming up like a birth or another major event, make the minimums on your debts and beef up your savings.
Angie says
Baby Step 2 is actually 3-6 months of living expenses.
Angie says
I meant Baby Step 3. Oops!
Amanda says
Step 1 $1,000 emergency fund
Step 2 Pay off al debt except mortgage
Step 3 Save 3-6 months worth of expenses in savings
Step 4 15% of your income in a retirement account every month
Step 5 Save for your childrens college
Step 6 Pay off your home mortgage
Step 7 Build wealth and give like crazy
(Dave Ramsey, Total Money Maker and Financial Peace University)