Saving vs. Paying Debt

There’s a bit of debate in the PF world regarding what should be your first priority: Saving or Paying down debt. If you care to share your opinion, I have a poll where you can vote for your priority. Or you could always comment below.

My Personal Opinion: Pay Down Debt. Now, that’s not to say you should start paying down debt with $0 saved. My first financial decision was to get a tiny little emergency fund for those, well, emergencies. Done. My top priority right now is to pay off my loans as aggressively as possible. Yeah, yeah. I know. I happen to go against what a lot of bloggers I respect do, and I can’t say that my way is the best way either. They are just student loans (aka “good debt”), are interest free, and it’s just paying back my parents… so why the rush?!

First off, because it’s my parents I want to pay it off ASAP. I just want to. I don’t want to go home for holidays for the next ten years knowing that I owe them money. They will not love me any less, but it will weigh upon me. They also need the money and it’s the least I can do for all they’ve given me. For those looking for a good lender, you can rely on Hard Money Lender Denver for commercial bridge loans, multifamily loans, single family rental loans. Expand your loan knowledge with the resources available on KreditFinanzcheck. I feel like the E-Fund I have now and other saving goals are sufficient enough for me to focus on paying the most to debt. Perhaps I was brainwashed by the Dave Ramsey’s Financial Peace University class I went to.

That said, here are some Saving Changes:
I need not forgo my savings plans just because my top priority is debt. I do want to pay my debt down ASAP–but by that I mean it will be paid off in one year at $500 per month. Any other extra money I earn I want to beef up my savings.

I have a “Wedding Fund” that I’m going to rename “Future Fund.” Well-Heeled blog made a comment about naming it Future Fund and I like that. I’m not engaged nor do I expect to be any time soon so why save for a wedding? I’m also going to swap the $2000 I have for this and with my $1000 E-Fund. (Look to the side progress bars if you’re confused.) When the time comes that J and I move into the same town together I’ll revisit this fund. That probably won’t happen any time soon.

I hope to have $6,000 in my Emergency Fund by December 2010. Once my debt is paid in a year, I will have six months left to put $500/month to my E-Fund, totaling $3000. I already have $2000 in there and so where do I get the rest of the $1000? In one year I’d have to put $83 per month to meet my goal. Therefore any extra money I receive will go towards my E-Fund–babysitting, selling things, $4 left in my clothes budget that I don’t use. This my friends is called Snowflaking! :) I’m quite excited!

Roth IRA: I will continue to contribute $100 per month towards this. I know I should increase that by more. Retirement is one area where I just do not have the motivation right now to pay extra on. Isn’t that the worst thing ever?

I’d love to have a Travel Fund, a Gift Fund, a House Down Payment Fund, and the list could go on forever. Slow and steady. I need to remember I am only 23 years old–plenty of time to reach those goals. Once my debt is paid off and my Emergency Fund is at at least $6,000, I think I’ll have more flexibility on reaching those goals.

So there’s my debt/savings goals. Any tips or changes you’d make if you were me? Please feel free to give your opinion on whether you think there’s an area I should forgo or beef up. Your opinions and thoughts really do matter. :)

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  • I tried for the longest time to pay off debt without having an emergency fund. And the first time any emergency happened I would use my credit card and BOOM I’d be right back where I started. It was VERY disheartening. So this time I’m doing it the Ramsey way and getting the emergency fund in place. Now this isn’t to say that I’m not paying down the debt. I’m still paying more than the minimums, I’m just paying $600/month on the debt and $100/month on the emergency fund – and then when the emergency fund is at $1,200 I’ll move to $650/month on the debt and $50/month on the E-fund until it is at $3,000. Then at $3,000 I’ll switch it to $700/month on debt. Which is (at my present salary) the most I can afford to put towards it. Then of course, any “extra” money I get goes to the debt.

    I think it is a good balance between debt vs savings. I think I need both, but not everyone is the same. From a “mathematical” stand point going “all debt” is the smart thing to do (if the debt has interest that is higher than a savings account – which most debt does). But from a “knowing how I am with money” stand point that just doesn’t work for me. =)

    I like how you’ve switched your two funds and renamed the wedding fund the future fund. Even though I’m sure it will get used for a wedding, I know if it were me just having that name would make me stress out about why I’m not engaged and how will I afford this and silly things like that – that just make matters worse.

  • Right now, I’m not at all focused on paying down my debt. “All” I have left is my student loans (all $42,000 of them!), but I’m just paying the minimums. Because life is just too chaotic right now. If I throw extra money at my student loans, that money becomes locked up. I can’t borrow it back from my student loans if something happens and I need the money. It’s gone. So my extra money (if there is any!) goes to savings, where I can use it for anything I need… including future month’s minimum payments on those loans!

    That, of course, is just my situation. Everyone’s varies. We all have to do what’s best for ourselves, and not what other people say we need to do. :)

  • I think if my loans were to a family member I’d probably want to pay them off too! If a loan really bothers you, that’s one thing, I’m just not on board with the PF blogosphere’s abhorrence of debt.

    I think your plan sounds just right given what I’ve read of your blog.

  • Those are great decisions. Balance to any situation is needed. As long as your family is cool with when you will be out of debt, it works.

  • If its any help… as I was building my EF….when i reached $1K, then I would pay down my debt with $500 of it. Rinse, lather and repeat.

    This might sound quirky, but it worked for me for 2 reasons.
    1. It was nice to pay a lump sum when I got to $1K in my EF
    2. My EF was there during the build up time for any potential emergencies. So, I felt I had a foundation.

    Best of both worlds. But I totally understand about wanting to pay your parents in the process.

  • It can be hard sometimes not to have a ‘Fund’ for everything such thing we should be/could be saving for. I’ve been struggling to save/pay down debt – and was feeling overwhelmed. As such (thanks for the comment by the way) I took about 80% of my Efund and used it to pay down debt.

    I’m now working OT and throwing everything I can at my credit card. I feel like If I don’t get it paid off now, I never will.

    I know I should have probably left my E-fund alone, but I talked it over with my parter (we have a house fund) and he’s comfortable using that if something comes up in the next few months before I get my Efund back up to snuff.

  • Although I totally agree with you, I can’t say that I practice what you preach. I know paying down debt is the smartest decision. But I find so much comfort in knowing I have six months of cash in my E-fund. I seriously think I would faint if I threw $12K of my $15K in savings and my student loan. I guess this is why it’s called personal finance :)