Savings Vs Debt Elimination: Saving’s Side of the Story
While most of the time I’ve written this blog, I’ve made debt elimination my primary focus, there is much to be said in favor of putting money into savings even while still in debt. From a small emergency fund to a full-blown savings plan, debt elimination isn’t always the first course of action. While I do generally fall into the debt elimination camp, even I saved a small emergency fund before I began aggressively eliminating over $30,000 in debt, and I recently upped that emergency fund in light of recent events and our economic situation. Here are a few of the reasons that creating some level of savings may come before debt elimination in a person’s or family’s priorities:
Saving money doesn’t commit it
When you pay money to a debt, you are doing just that – letting go of money under your control and giving it to someone else. This reduces your obligation to that person or entity, but it also commits that money. The money’s gone, and you can’t take it back and make another choice with it. When money is put into savings, it is flexible. There are many possibilities for the money you save. Which leads to the next point…
Preparing for the unexpected keeps the unexpected from destroying you
One of the things, maybe the main thing, that throws a person’s or family’s finances off track is the occurrence of something unexpected. From a home repair to a car repair to a job loss to a health problem, there are many unexpected things that can happen. Having money in savings allows you to deal with unexpected things without going deeper into debt.
Security happens in many ways
Having money in savings provides a level of security and a feeling that one can handle life’s challenges. This relates to the above unexpected comment, but is different because it is the provision of peace of mind even if nothing unexpected happens. That level of security is sometimes necessary even more than the security of eliminating a debt.
Interest rates don’t lie
What happens when your savings rate is higher than your debt rate? While that might not be common in today’s economy, it has happened before, and will happen again. In fact, some people currently have student loans at a low enough interest rate that their savings rate at some point may exceed it. While that may not be a big enough reason for some to save vs aggressively pay down debt, it can make financial sense.
Should you pay down debt aggressively or save money aggressively? Only you can really answer that question, by really looking at what makes more sense for you. What makes your heart feel good? What mix of savings and elimination work for you? Where does your perfect mix lie?
August 17th, 2009 at 9:04 am
Ah, this makes me feel a lot better: my husband and I decided yesterday that whatever money I make (we’re planning to live on his graduate stipend in the event that I get pregnant and suddenly we can’t depend on two incomes anyway), will alternate between additional student loan payments (we have no other debt) and savings.
So I guess your timing was perfect with this post; thanks for the affirmation I needed!
August 17th, 2009 at 9:52 am
I love this perspective. So often we hear the Dave Ramsey prescribed 1,000 or the 3-6 months rule for emergency funds. After that so many personal finance writers tell us to stop saving and go hog wild on the debt. I love this perspective that that approach just might not work for everyone. I built up my emergency fund and then we kept saving for specific purchases. Because we have several years of debt repayment in our future (student loans) I like that we can save for Christmas gifts, vacations and other enjoyments in the meantime.
August 22nd, 2009 at 7:59 am
I think you should get a $1000 emergency fund going and then start paying the debt. One thing I found helped with putting money into savings was making a spreadsheet that had columns based on what the savings was for whether emergency fund, insurance premiums, etc. This way it does have a name and not just a lump sum that is easier to spend
August 22nd, 2009 at 9:31 am
this is the problem my husband and I are having…. we have about $12000 saved up but won’t be able to buy a house for two more years (finishing grad school far from where we will live/be employed). He has about 7K in car debt, about 15K in student loans, and I have about 20K in student loans…. trying to figure out how to best use that money. Right now, interest wise, we should pay things off, but the worry is whether that is actually smartest.
August 24th, 2009 at 3:03 pm
I miss you paidtwice! I enjoy getting your updates of how your debt repayment is going. It gives me hope I can dig out of my student loans too.
August 26th, 2009 at 2:50 pm
I don’t know about my perfect mix of saving vs debt elimination but I would like to do 2 things at the same time. In the mean time however, since I’m working two jobs and go to school full time, I think I need to save more and make only minimum payment for my credit cards.
The job is not stable so I don’t know when this income source will end. If I have a nice nest of saving, then I can survive if I lose the job and still make the minimum credit card payment without suffering from any stupid fees. If I’m eligible for student loans with the low interest rate than my credit card now, I think will take out some loans and pay off a big portion of the credit card debt. But it seems they are cutting down loans as well so this plan may not be achieved for now.
September 5th, 2009 at 5:34 am
This blog post links to a report that says that having $500 of savings makes a big difference to your financial stability and stress levels, even on low incomes. So a basic savings cushion doesn’t have to be much to make a big difference.
September 8th, 2009 at 1:15 pm
Where are you??? I’ve been checking the sites for updates and have been disappointed to not see any. Hope all is well….and look forward to your future posts.
September 19th, 2009 at 2:03 am
I’m a big fan of saving and investing even while paying down debt.