Paying debt or save
User S.Miles (Opens a pop up layer) Contributor
User xiaopiseh (Opens a pop up layer) Contributor
User J.J. Montanaro USAA Community Manager
Although your ultimate short term savings goal should be to build up the equivalent of three to six months worth of expenses in a trustly old savings account--your emergency fund--you've got to balance that with paying off your existing debts. So, I would recommend you build up $1,000 in savings to provide a little bit of cushion against racking up more debt if something bad happens and then really get after your remaining debts. Good luck
User Kaelaface (Opens a pop up layer) Contributor
You should read the Total Money Makeover by Dave Ramsay. It will totally change your perspective on money. It got me debt free for the first time since I went off to college. It's a bit more complicated than this but you should save $1000, then pay off your debt. Then start saving 6 months of living expenses. Pay for everything in cash. Read the book, it's simple and extremely useful.
User everimprovingme (Opens a pop up layer) Contributor
I wrote that down as we have found ourselves in a very precaurious position debt wise. We used to be a 2 person/2 income family. In June we turned into a 1 income family and now there are 3 of us. Money is getting harder to stretch. We went to NMCRS to get help with a budget but they didn't really help as out any there. They more just pointed out how much we needed to cut out of the money we spent without making any real suggestions on how to do that.
User jimmi1 (Opens a pop up layer) Contributor
Debt is debt, money you didnt have. Each debt payment is guranteed the reture based on the interest rate of the debt. Feels great to not have debt too. I include house as well even though some people call that good debt.
User trainingnco (Opens a pop up layer) Contributor
I agree with earlier posts.
You will find it much easier to save without outstanding debt hanging over your head.
For example, my wife had some remaining college debt. By paying that off first we ended up saving over a $1000 by paying that off as soon as possible and then focusing on savings, instead of saving first and slowly paying off debt.
When you calculate how much money you currently have it is best to subtract debt from savings to see where you actually stand. Once you are close to $0 debt your savings are actual money you have set aside, and don't owe anyone.
The interest rates on debt usually far excede the intrest gained on savings, so I would highly recommend you pay off all debts first, then when you no longer have those expenses tying you down, focus on saving as much as realistically possible.
For example. Assume you have $2000 in debt at 10% interest, and lets say $500 a month spare change to work with.
If you put $200 towards debt and $300 towards savings every month, it will take you 10 months to pay that off before interest is even accounted for. At 10% that number jumps up $200 the first month to $2200. If you pay $200 to bring your initial debt to $1800, the 10% interest will be $180 bringing amount owed back up to $1980. So in 1 month for the cost of $200 you have only cut into $20 of debt, and only have $300 in savings to show for it. Now if you pay $500 instead the first month you reduce the initial debt to $1500, plus intrest is 1650. Next month is $1265 (after interest), then month three is $841.50, then four is 375.65, then on month six debt is $0 and you have $124.35 towards savings. Now you are debt free, and every subsequent month you now have the full $500 towards savings. In 6 months that will turn into $3000 and you are debt free on top of it.
If you paid less on debt and put more in savings you would end up with far less in savings at the end of 12 months, mostly due to building interest on outstanding debts, and sadly going that route you will still have debt remaining at the end of 12 months.
User JWood (Opens a pop up layer) Contributor
Dave Ramsey is a great financial mind, and advisor; but there is a critical point to his advice....he is not YOUR financial advisor. He knows nothing of your situation, your tendencies, your disciplines, your motivations. His advice is a great general rule. But you need to think about what motivates you. Is it going to motivate you more to see an extra $400 in your savings account at the end of the month, or to see one of your debts with a $400 lower balance? Which ever will get you more and more motivated to continue or even increase your movement in a financial 'right' direction, then that's probably the best choice for you.
If you have breathing room every month, whether you pay down debit or save, really makes no difference; other than the rate as mentioned by some prior posts. That should be a main focus in your decision making process though. The reason it makes no difference to save for a cushion or pay down debit, is that if you save $400 this month to start your savings, and you need to get new tires for $400 the next month; you are still out the $400. Whether you pay it from savings or a credit card that would have a $400 lower balance really makes no difference. An emergency is an emergency, and if you are in an accumulation phase of 'cushion', where the funds come from in that emergency is irrelevant. Once you are close to, or have a cusion, is when a moderate or large emergency makes more sense to use savings that is earning a low rate of return. Due to the low opportunity cost of interest loss as apposed to the interest expense of a debit obligation.
Focus on what will get you most excited about being more financially secure, and what will help you keep that focus. That's the best place to start.