Ask Savvy
2K Followers · 184 Items
Delicate blue crystal beaded bracelet
aliciatx
Saved 4/14/11 to Ask Savvy

Pay debt or keep savings?? What should I do?

7

I've been really tempted lately to take all the savings I've worked so hard to save & pay off all my debt. My debt is only two kinds, student loans and a car loan. The amt of the debt is overwhelming to me, and I technically have enough in savings to pay it all off, but if I do, I'd only have about $500 left to my name. Paying off this debt would really only free up about $450 each month so it would take me a while to build up my savings to where I am right now. What do you guys think? Bite the bullet & pay it off? Pay off half? Keep my savings and instead add to my retirement or start investing? I don't have any retirement accts other than my 401k and I dont want to touch that. If it helps, my student loans are at 4.5% and my car loan is at 2.35%, I have my savings in a money market that is only at .7% so I'm not making much. I've also been wanting to start a small business and if I pay it off it would take me years before I could afford to do that. I'm so wrecked with indecision & don't know what would be best. Any tips? Thanks everyone!

Saved to

Ask Savvy

Delicate blue crystal beaded bracelet Sound Uncovered App 1STDIBS.COM - Stanley Weiss Collection - Carved Mahogany and Giltwood Chippendale style Mirror How Can I Tell My Friends Not to Pay For Me at My Bachelorette? Their Wedding Registry Is Out of Our Price Range Ask a Savvy Bride: My Engagement Is Wreaking Havoc on My Credit Card Sharing Your Credit Score with Facebook
GregS GregS
Good advice here. A combo of them will be excellent. You should have 3-5 months salary in the bank as a cushion. If your job is secure you may risk a bit less, but don't go too far. Savings accounts are paying under 1%. Credit card interest payments are over 18-21%. Pay those off first. If you have a lot of debt, pay minimums on the lowest interest charging accounts and pay off the highest as quickly as possible. Then repeat until all those credit cards are paid in full. Keep 2 cards and destroy the rest. All of them. Student loans are probably the next highest interest rate, then the car (unless it's a used car loan). I'd probably pay off the car loan first. It's probably more reachable as a goal. I'd imagine that the student loans are in the 10's of thousands in principal. Maybe make an extra payment on that one every so often, or add a bit to the principal payment every month. The key is to stagger them so no one payment hurts.
Congratulations! I was in the same position last year that you are in now. I paid my debt completely, however you have an interesting option available to you. You can pay off your car loan and keep your student loan debt. The interest on a student loan is tax deductible, so you can take your time here. The car loan, however, is not. That interest will probably cost you more than what your are earning on your savings. So pay the car loan and keep the student loans open, while still saving the money that would have gone to car payments. Moreover, now that you own the car, it's a good idea to either open another savings account or mentally reserve a portion of your savings to go towards car repairs. This way, you'll be prepared and able to afford the maintenance on your car even as it ages in years to come. Good luck!
care0531 care0531
I would maybe start by paying off 1 of the debits and then continue to add that money you free up to savings. See which one you are paying the most interest on and pay that one off.
DazzleDe DazzleDe
I agree with @bengal - you're money in your savings account isn't doing anything for you - your debt is growing at a much higher rate than your savings. Put your debt in order from least to greatest (don't worry about interest rates now) and focus on paying of your lowest debt first. This is probably your car loan. Then move on to your student loan. I'm going to assume that you are in your mid-20s. If that is the case, you can afford to forgo 401k contributions for a few months. A lot of people will tell you never to do that, but there is plenty of literature out there that suggests at that stage you can afford to do that and with monthly savings you will acquire after paying off your debt, you can throw that money into a roth or traditional IRA. So, keep 1-2 months savings and pay off as much debt as you can. Then pay off remaining debt from least to greatest. Then throw all the money that you would have otherwise spend on debt, 401k and put that into savings until you have about 9 months stored away. Then focus on getting your retirement money back to where it should be (401k and IRA). There are a couple of caveats to this general line of thinking. For example, if you employer matches your 401k then you want to continue to contribute up to the point where you are matched because that is free money that you don't want to waste. Another caveat is whether you right on the threshold of your tax bracket and need the contrubutions to lower your taxable income. For the most part, once you pay off your debt you will be back to where you are in terms of savings and you will still be able to contribute to retirement in a meaningful level.
bengalspice bengalspice
I feel you should pay the debt off as best you can. You are losing money at a faster rate than the interest rate you can earn on your savings. With rates now on savings accounts, it's become pointless to have a savings account. Have you started using programs like Mint.com to set goals and stuff? That might help is tracking how long it will take to rebuild your rainy day savings or to pay off that debt according to the rate you want to save/pay. Good Luck!
lauren lauren
that is great advice lilaD! I was going to suggest the same thing. Also, if you can try to just pay more on whichever one is higher interest. There are also other theories that you should pay off the smallest one first and throw all of your extra money at it, you can pay it off quickly and feel a sense of accomplishment and move on to the next debt! I def. think it is important to have a nest egg for a rainy day, you never know when they will show up! Good luck and let us know what works out for you, it is always fun to hear how people deal with their finances.
LilaD LilaD
Congrats on doing such a great job saving! I definitely would not use all of the savings to pay off your debt, as frustrating as it is to see those huge numbers that you owe! You'll be putting yourself in a position where you won't have the resources to respond to emergencies or opportunities. Also, if you lose your job, what will you do? I would figure out how much money you'd need to survive without a job for at least 3-4 months (and honestly, I'd probably have much more than that) and then if there is money left after that, I might consider putting it toward debt.