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Pay down debt or create savings account?



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amother


 

Post Wed, Sep 17 2014, 10:29 am
I'm looking for advice on what makes more sense.

We are a family of 7 earning approximately $250k/year before taxes and $90k after taxes/tuition/mortgage.

We have a lot of debt and no savings. Currently we are putting any extra money into paying down debt (so we started out with $320k debt a few years ago and are now down to $230k (so approximately $30k/year to debt). At the rate we are going, we will be paid off in about 7 years.

The thing is, it's driving me crazy that we have ZERO dollars in savings. Our plan for marrying off our children is that our oldest will be shidduch age in 7 years (when we will have paid off our debt) so the "extra" $30-$40k that we will then have will go to that. . . We are stressed out and scrambling every time a big unexpected expense comes up (ie needing a home/car repair).

Please don't suggest that we make more money/spend less (I KNOW we have to do that and we are trying). Just let me know if you think we should be paying back our debt slower (I hate having it over my head) and putting money into savings.

TIA!
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LiLIsraeli




 
 
    
 

Post Wed, Sep 17 2014, 10:31 am
I'm no expert, but is it possible to put some away while still paying down debt? Say, 1k a month into savings, which leaves you with 12k for savings and 18k for debt payments. Or even less - $500/month for savings, with 6k for the year and 24k towards paying down debt.

ETA: Dave Ramsey advocates for having an emergency fund of $1000 in savings and using the rest to pay down debt as fast as you can. The longer you have debt, the more you end up paying in interest. IMHO you can also save up while you do that, especially if you know you will need the money for education, weddings, etc.
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asp40




 
 
    
 

Post Wed, Sep 17 2014, 10:34 am
Yes, you need an emergency fund. I would split and do half and half.
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pesek zman




 
 
    
 

Post Wed, Sep 17 2014, 10:35 am
Pay down debt
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grace413




 
 
    
 

Post Wed, Sep 17 2014, 10:37 am
General advice is to have an emergency savings fund equal to 6 months living expenses and use anything else to pay off debt.

If you are paying interest on your debt you will lose money by putting it into savings as opposed to paying off the debt.

If by any chance you are not paying interest on the debt, then it's a different scenario (for which I don't know the answer).
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LittleDucky




 
 
    
 

Post Wed, Sep 17 2014, 10:56 am
Debt should be paid off but if you will have to increase your debt every time the car needs to be repaired, ie there is no flexibility in your budget-put away a small amount every month towards savings. Not college/wedding but for the surprises that happen every so often. What do those expenses tend to look like in dollars and about how often do they come up? Start small-even a few hundred add up quickly. Once you get your 6 months of basic expenses, put that extra a month all towards paying down the debt.
And good for you to be working on this!
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perquacky




 
 
    
 

Post Wed, Sep 17 2014, 10:57 am
I think you also need to take into consideration how much interest you're paying on your loans/credit cards, etc., and how much interest you could potentially earn on savings or investments.

Having money in savings is important (Suze Orman says it should be 8-months' worth), but the interest you make on it could be close to nothing. Whereas, if you're paying interest on your debt, and you stop paying it off, the amount you owe will grow.

Do you have money in retirement? That's something else to consider.
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amother


 

Post Wed, Sep 17 2014, 11:07 am
From a straight dollars-and-sense perspective, it makes sense to pay down debt and avoid interest.

The best financial advice I ever received, though, was exactly the opposite and echoes what Little Ducky said:

What happens if you have little or no savings and your vacuum breaks? Let's face it: you'll go buy a new vacuum and put it on your credit card. But if you have even a small savings account, you can pay cash and avoid taking on more credit.

Yes, it might take you longer to pay off your credit, and you might even end up paying more in interest than if you'd paid it off faster. In the long run, though, getting out of the credit card habit to solve routine problems will give you greater financial security.

FTR, DH and I have one credit card with a $300 limit. Everything else is a debit card tied to an account. Our only debt is our mortgage. I'd like to say we have healthy savings, but we really don't, and I'd feel much better if we did. I do feel good that we have no consumer debt, though.
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amother


 

Post Wed, Sep 17 2014, 11:15 am
OP here, I want to clarify what our debt is so you'll have more information:

about $40k on credit card, zero percent interest
about $40k heloc, 4% interest
about $30k student loans, 4% interest
about $140k personal loan to family member, 2% interest

(I see it's more than the $230k I originally wrote Sad

Also, it would take us a looooong time to save up 6 months of living expenses (as a lot of people suggest).

Does this change anyone's answers?

Thanks!
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busydev




 
 
    
 

Post Wed, Sep 17 2014, 11:16 am
in essence every purchase you make while you have debt is being charged interest. def better to pay off the debt as fast as you can.

tho having a 3-6mo living expense emergency fund is also important, but after that debt, debt, debt.
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LittleDucky




 
 
    
 

Post Wed, Sep 17 2014, 11:38 am
amother wrote:
From a straight dollars-and-sense perspective, it makes sense to pay down debt and avoid interest.

The best financial advice I ever received, though, was exactly the opposite and echoes what Little Ducky said:

What happens if you have little or no savings and your vacuum breaks? Let's face it: you'll go buy a new vacuum and put it on your credit card. But if you have even a small savings account, you can pay cash and avoid taking on more credit.

Yes, it might take you longer to pay off your credit, and you might even end up paying more in interest than if you'd paid it off faster. In the long run, though, getting out of the credit card habit to solve routine problems will give you greater financial security.

FTR, DH and I have one credit card with a $300 limit. Everything else is a debit card tied to an account. Our only debt is our mortgage. I'd like to say we have healthy savings, but we really don't, and I'd feel much better if we did. I do feel good that we have no consumer debt, though.


Thanks-you said it better than I did. Help get out of the credit card habit as well as stop adding to the debt.
On a personal note: How do you not have any debt? Car payments? Student loans? Student loans are a real killer, especially as the job market tanked (and even though there were jobs available in my field when I went into school, there are none now.). I don't like credit cards and only use them when I have money in my account to pay for it (but need the CC for shopping online, airline tickets etc). So no CC debt but at the same time other debt...
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Barbara




 
 
    
 

Post Wed, Sep 17 2014, 11:45 am
amother wrote:
OP here, I want to clarify what our debt is so you'll have more information:

about $40k on credit card, zero percent interest
about $40k heloc, 4% interest
about $30k student loans, 4% interest
about $140k personal loan to family member, 2% interest

(I see it's more than the $230k I originally wrote Sad

Also, it would take us a looooong time to save up 6 months of living expenses (as a lot of people suggest).

Does this change anyone's answers?

Thanks!


How did you manage 0% on credit card debt, particularly at that level of debt?

You need savings. Not because you might need to purchase a vacuum cleaner, as someone mentioned. Because someone could become ill, or lose a job. Or your roof or car or something else very expensive could need to be replaced.

I'd suggest that after making the required monthly payment on each debt, you divide any remaining funds between savings and debt, paying off the student loan first.
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Hashem_Yaazor




 
 
    
 

Post Wed, Sep 17 2014, 11:48 am
Do you have minimum payments for the debt that must be paid monthly? I would prioritize the debts with the highest interest -- is there a way in the next year and a half, the 30K could be paid off, and then you could use that extra for savings while prioritizing the 40K with 4% which could be finished off in the next year and a half? In 3 years, is it conceivable you would have only the debt with 0-2% interest?
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cfriedman2




 
 
    
 

Post Wed, Sep 17 2014, 12:59 pm
If you are bringing in 250k a year before tax, tuition, & mortgage I would highly suggest meeting with a financial planner to discuss your options for the debt/savings. Since no one here has responded that they do this for a living I would leave it up to the professionals who know their stuff.
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boysrus




 
 
    
 

Post Wed, Sep 17 2014, 1:09 pm
maybe you should PM the imamother named Tova, she has mentioned many times in threads that she does financial stuff/accounting/budgeting help for a living. I am sure she could give a very helpful answer to you
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causemommysaid




 
 
    
 

Post Wed, Sep 17 2014, 5:40 pm
what about half to savings and half to debt? you'll pay everything off in 14 years. not so bad.

the rates you mention are very very low. I wouldn't pay it off so fast.

how do you have 0% on a credit card? is this a promotional rate that will end soon? if so then I recommend paying that off ASAP. credit cards are notorious for their high interest rates. You could be paying 17% very soon.
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Tova




 
 
    
 

Post Wed, Sep 17 2014, 6:54 pm
boysrus wrote:
maybe you should PM the imamother named Tova, she has mentioned many times in threads that she does financial stuff/accounting/budgeting help for a living. I am sure she could give a very helpful answer to you


Hi, I'm flattered at the call-out :-). I see previous posters already mentioned Dave Ramsay as well as Suze Orman as well as emergency fund equaling X months of living expenses as well as the concept of paying down debt with highest interest rate (Dave Ramsay actually advocates paying down debt in order of the balances regardless of interest rate due to a psychological effect). Not much more I can add! Overall I would lean to, again, as others have mentioned, a blended approach of paying down debt aggressively along with putting into savings as aggressively as possible too. Op, you said not to mention about cutting down on expenses, as you know about that, but with 90K left after taxes, tuition and mortgage I would HOPE you have a lot of wiggle room that you can do some serious expense reducing. Much hatzlacha...
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SRS




 
 
    
 

Post Thu, Sep 18 2014, 8:08 am
I think the first thing that needs to happen is that you make a mentality change first. That is where Ramsey, Orman, or many other systems come into play. To turn $250K of debt (which doesn't include a mortage, just a HELOC, right?) into a financially healthy future, you have to completely reorient the mentality of how you got there. You mention that you have 7 years until you take that same money for shidduchim for your oldest and I think this mentality is how you have come into $250K of debt-debt on top of a very nice income of $250K and that is really the mentality that needs to be examined and combated to get out of the mess and create a healthy financial future which you can have.

I think that you have the income to be rid of all of your debt in half the time you think it will take if not sooner if you are completely willing to do something drastic now and in the future (I.e. your kids might need to figure out shidduchim themselves while their parents get themselves a few dollars of their own because that money was spent already Sad ).

But to answer your question, I think you should save $1000 in cash and then up it $1000 every 3 months all while you are changing your spending habits and paying off your debt. I think that if you have solid, attainable goals you will not only achieve a savings goal, but it will push you to amp up the volume on the debt and you will achieve more quicker by really putting in the 110%.
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