Monday, June 10, 2013

Pay or save

We read that we shouldn't be saving in low interest accounts when we have high interest debt. Thankfully, none of my debts are higher than 6.55%. But that's still a lot more than the 0.75% and 0.90% I am getting from savings accounts.

In July, I will have $2000 saved up, which was rebuilt as a car down payment. This fund ideally is set aside for whenever I decide to change my vehicle, mid/late next year. I also have $420 which was from one of my yearly goals (car down-payment related), plus the $250 I spoke about from my "phone" fund. That's about $2670 in all. I'd still have my $1k EF, $1600 in misc. saving goals like Christmas and vacations and a $125 "slush" fund.

Now here's the deal:

I honestly don't foresee having to change the car or perform any heavy maintenance on it in the next 9 months. 9 months is the time it will take me to rebuild the fund once again. Of course, I don't know the unexpected, but I'm giving hope a fair chance.

Should I use all of these funds to make lump sum payments into my debt? My debt would be paid off January 18, 2014 instead of April 26, 2014. I'd save on interest too, though I can't calculate exactly how much. I can be sure it'd be over 0.90%. Would you trade off the small security of having money available in exchange of faster debt-freedom?

11 comments:

  1. I get the savings vs debt debate, but I always feel more comfortable by having a larger amount of money set aside in the bank. And if the difference is three months in this case, that doesn't seem like enough of a draw to get rid of the debt earlier, but it's your call. Maybe debt-free is more important. I like the safety of more padding in my account

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  2. Without a doubt I would NOT sink every penny I had into Debt... IF something happens and you need instant cash, you're right back where you started. Maybe 1/2, but def not all...

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  3. I would keep the money in savings unless you were able to knock out one debt that would really impact your monthly cash flow. The interest you will pay is minimal compared to losing a large portion of your safety net.

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  4. Alright, thanks all. I guess I am getting impatient. It's not all of my money (I'd keep my EF and other goals), but I'll tinker with it and see if half would make a difference. The lump sum payment would "free up" about $100/mo (which gets bundled into snowballs, so it's "free" for choice). I appreciate your responses!

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  5. If you are still going to have the EF left, I'd go for it as I know how it feels to be impatient. You would also free up some cash flow.

    Like the other comments though, three months isn't a whole lot. My advice would be, keep paying down the debt as normal until January 18. On that day, you can then decide if to knock it off completely then and there or stretch it out for the next three months. Only pay it off in January though if you will have your EF and other savings goals left as it still is a threat to use so much money.

    If you could calculate the exact savings on interest, I think that would help you make a better decision.

    Oh, you could also just pay a little extra each month by dipping in the savings in pieces, that way you won't completely empty it one time and you should still pay it off earlier. This one just came to me.

    Anyways, you are on the right path and any option is a good option. I wish you the best.

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    1. I actually like this idea a lot. I think I'll wait until Jan, and if all is well, dump the money and quickly rebuild it. Thanks for the idea!

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  6. My goal for this year was to pay off my student loans. I've paid over $4000 on them so far this year. Then, the only property that we would ever consider buying as an investment came on the market. Now I wish I would have just put that money in my savings instead of automatically paying extra on my student loans. Then if I don't need the money, I could have just paid off my student loans all at once when I had the final amount saved up. It would have been nice to have that money as an extra cushion. My point is, you never know when circumstances can change. Better to have the money in the bank until either you need it for your car or you have enough to actually pay debts off.

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    1. You are right. One never knows. I'll thread carefully with it.

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  7. I like having a cushion, which I never have!!!! A few months won't make that much diff but if something comes up and you don't have $$$ it would! But hey What do I know, I am in a bk!!!! :-/

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    1. You know a lot, since you've been in one end of the spectrum. I hope you can get your EF up fast. Good luck!

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  8. Hey, Tanner! As you mentioned, you don't know the unexpected, so I say hold off using all the funds to make the lump sum payments. Perhaps you can consider paying more than what you regularly put down, but do make sure you still set aside some in case an unexpected situation comes up.
    -Jaden@Toronto Bankruptcy Advice

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