Save or Pay off Debt?

[taymaesmom]

Dh and I both work for the same small company. Last week the owner passed away very unexpectedly. The owner's wife will inherit the company and wants to keep it open, but honestly I'm quite worried. What we do depended on the owner's daily input. Dh and I decided that I would look for another job with benefits just in case the company closes, that way we both wont be out of work at the same time.

So now I am determined to get us as financially secure as possible. But we are torn on what to do with our money. I really want to save every penny, but dh feels we should pay off our debt instead. We honestly don't know which would be best. Should we split the difference?

So what would you do?

 

[RitaE]

At this point in my life I wouldn't do much because we already have a healthy savings account. But there have been other times in my life that I would have been hoarding every spare penny I could find because when the crap hits the fan, cash on hand is king.

Not that I'm assuming the wife has any ill intent at all, I just think you're right to be worried because she is just in a very unsettled place right now and what she thinks she wants to do right now has no guarantee toward being how she's going to feel over the next months and years.

 

[Mickfarland4]

I would pay off the debt first. Having less debt means you need less income coming in to pay it.

 

[Jen and Ashwin]

I would say it depends on several things. What kind of debt is it? If it's a mortgage or car loan, I wouldn't pay that off early. If it is credit card debt, I would start saving 3-6 months of living expenses in an emergency fund. This is usually the common wisdom because most job searches can take that long. Once you have an emergency fund, then start paying down the debt by making minimum payments to all balances and applying extra money to your highest interest balance, then move to the next highest and so on. This will really set you up for more security.

 

[descovy]

Definitely save. Cash is king in this instance. When your job is secure by all means work toward paying off that debt. But in the meantime, pay the minimums (keeping your accounts in good standing) but sock away the cash until the job situation gets more secure.

 

[Minniesgal]

I have been having this argument with myself head versus heart for months. I had enough in savings to clear our mortgage but my head was telling me to wait until we could pay it without reducing my savings whereas my heart just wanted to own our house outright. I caved this month and paid off our mortgage managing to keep half our savings. It feels good to own our house but I don't really feel more secure.

I think in times of potential reduced income having cash is better than no debts. Ideally it would be best to have both but Id conserve cash until you know what you are dealing with and once the risk goes you vcan use the cash to clear the debts.

 

[craigkerstiens]

Similar to previous posters, it really depends on the type of debt. If it's any form of long term payment with a low interest rate, then paying it off is usually worse than having it in something that's creating higher returns for you (which is often not savings). If it's credit card debt, the interest rates are almost definitely bad and paying it off if you've got a large balance is advisable. As a rule of thumb I'd aim to (in order):

1. Have 3-6 month living expenses in savings, this includes all minimum payments on mortages/cars/credit cards. You generally want this to be somewhat easy to access to stocks which have volatility are not ideal, something like a general savings account that's generating a pretty low return in interest is usually an okay bet. Online bank savings accounts here are often better than traditional banks.
2. Pay off credit card debt and not carry a balance
3. Build up some base level and get it into an Index ETF (a basic S&P Index will average a return of 10-12% a year over the long)... Yes prior years are not a guarantee for future years, but it's still a widely held opinion that over the long term this will do better than many other avenues. Many will recommend trying to get to a 10k amount into an index ETF before trying to do much else

In a deeper sense look at how much various investments and savings are giving you over the long term. Credit card interest rates are 10-20% often a year, so any debt there is costing you a lot. Mortgages, and sometimes car payments, will give you generally a better rate from 3-6% a year. A basic savings account is going to give you about 1% a year–so you lose money relative to the others. And then index funds and stocks well that can be all over the place, but details on long term of S&P above make it so investing in it over having 0 debt on a mortgage is more advantageous in the long run.

 

[gracie1]

I have been having this argument with myself head versus heart for months. I had enough in savings to clear our mortgage but my head was telling me to wait until we could pay it without reducing my savings whereas my heart just wanted to own our house outright. I caved this month and paid off our mortgage managing to keep half our savings. It feels good to own our house but I don't really feel more secure.

I think in times of potential reduced income having cash is better than no debts. Ideally it would be best to have both but Id conserve cash until you know what you are dealing with and once the risk goes you vcan use the cash to clear the debts.

Congrats on paying off your mortgage!!!! You should be celebrating! That is awesome!!

 

[Minniesgal]

Congrats on paying off your mortgage!!!! You should be celebrating! That is awesome!!

Thanks it is nice. Not as exciting as I expected but still nice

 

[damskipi13]

taymaesmom,
I agree with the others that knowing more about your debt would help us provide relevant advice, and I'd go one step further in saying that any financial information you are willing to provide would make the advice that much better. My advice to someone with limited career maneuver room, minimal savings, no investments, and lots of credit card debt is going to be very different from the advice I'd give to someone who can work anywhere, has an emergency fund already, and only debt is a mortgage.

Any of the following information you'd be willing to share would be helpful: what kind of debt do you have? Is it high interest rate (>10%) or low interest rate (<5%)? Do you think you can get another job with benefits easily, or will it take a few months? Do you already have savings, and if so how many months of living expenses could it cover? Do you have other investments? How much can you use each month for savings/debt payment? What are your monthly living expenses?

I'll tell a story and then tell you my advice without knowing the answers to those questions. First, the story: The first house I bought was a short sale from a guy who thought this house was his dream house - he was going to die there. He bought the house at the height of the market in 2007 and paid ~$360,000 with 0% down, so a mortgage of ~$360,000. When the market crashed, he was okay for awhile. He had a good job and plenty of savings. Then in 2010 he lost his job and he made what I think was the worst decision he could have made. He decided to take all of his savings (~$140,000) and put it towards his house. The problem was, prepaying principle on your mortgage doesn't mean you stop getting mortgage statements each month, it just means you will pay it off earlier. So now he had no job, no savings, and he still had his mortgage and other expenses. Long story not-so-short, he racked up massive debt trying to keep his head above water but eventually lost the battle. If he had simply lived off his savings he would have had plenty of money while looking for a new job. Very sad story.

So without knowing more about your situation, I'd do the following.
1. If you are contributing to retirement accounts, change your contributions so you are only contributing enough to get the match. No match, no contributions for the time being. Just MAKE SURE you restart when this is over
2. Go over your budget with a fine tooth comb and stop spending on unnecessary items. You can always restart cable and clothes shopping when you are certain your jobs are secure.
3. Put your excess money into an emergency fund until you achieve 4-8 months of living expenses (2 months each for you and DH, plus more if you have children at home)
4. Once you have a solid emergency fund, if you have credit card or other high interest consumer debt you should pay that off. If you don't have high interest or consumer debt, I'd start/restart retirement accounts.

Hope that helps! Sorry for the long post

 

[eliza61]

So I always ask "what if" and insert the worst case scenario.

1) If I don't pay my credit cards what's the worst that can happen? I get lousy credit, no big whoo imo
2) If I don't pay my mortgage what can happen? I can be homeless. major problem.
3) If I don't have cash what can happen? inability to purchase necessities.

In a crisis, I'm a hoarder, I want liquidity and will risk my fico score for it. If you have a mortgage with a low interest rate I would simply keep making payments and every thing else goes into a savings account

I would definitely be stockpiling money right now.

 

[Nayan]

Don't pay off debt, but continue to pay the bills and cut out/downgrade everything that isn't important (cable, cell phone, dining out, etc.). You'll need money for daily living, but if you were to pay off debts then a total "OMG!!" happens you'll be glad to have the cash to deal with it.

 

[Gumbo4x4]

If its CC debt, pay it off. Worst case scenario, you charge it all back later.

I wouldn't pay ahead on a mortgage only to run myself short of cash & find as a result, I'm unable to make future payments.

 

[sharona]

So I always ask "what if" and insert the worst case scenario.

1) If I don't pay my credit cards what's the worst that can happen? I get lousy credit, no big whoo imo
2) If I don't pay my mortgage what can happen? I can be homeless. major problem.
3) If I don't have cash what can happen? inability to purchase necessities.

In a crisis, I'm a hoarder, I want liquidity and will risk my fico score for it. If you have a mortgage with a low interest rate I would simply keep making payments and every thing else goes into a savings account

I would definitely be stockpiling money right now.

Don't pay off debt, but continue to pay the bills and cut out/downgrade everything that isn't important (cable, cell phone, dining out, etc.). You'll need money for daily living, but if you were to pay off debts then a total "OMG!!" happens you'll be glad to have the cash to deal with it.

+1

 

[Stacy's a freak]

Another vote to keep the mortgage and save cash for a cushion. If you find yourself with enough extra in the 6 months savings to payoff the credit card, go for it at that time. It's tempting to payoff those credit cards but remember that many who do end up racking up the debt again just because they feel safer. It's pretty easy to pay a card off and think "I'll just charge this tank of gas and those groceries and that shirt" and then when the bill comes it is larger than expected and you're stuck with a balance again. However, if you have a balance on that card you will think twice about charging on it and will be forced to pay at least the minimum to keep your credit in good standing. And you will still have that savings in case things go awry.

 

[tvguy]

Without question, pay off debt. When I lost my job 10 years ago the most comforting thing was I had my house and cars paid for, and had zero debt. Yes, it reduced how much we had in savings, but we could get by on just DW's salary without dipping into savings, something that would have been impossible if we had a mortgage and car loan.

 

[crisi]

Cash is king. Without jobs, you won't be able to borrow more should you need it to get through, so keep the cash you have. And cut everything non essential NOW and start stashing that cash.

If you have a year or more worth of spending in the bank, THEN you can think about paying off the debt.

TVGuy's situation is different, he could do it off one income provided there was no debt. You both work for the same company and believe you both may be out of work.

 

[taymaesmom]

So for debt we have our mortgage, we owe about $40,000, interest rate is about 5.5 if I remember right. We also have a second mortgage, we owe $6000. We have 2 car payments, one is a new purchase but at a very good interest rate and pretty low payment so that isn't getting paid off. The other we owe about $2500. We do have 2 other paid off vehicles and would consider selling one if needed. We have 3 credit cards and owe about $5500.

Its been a tough year, hence the medical bills and we have really tried to get things paid down. So right now I would say we only have about 1.5 months of living expenses in savings. Outside of our mortgage, our two biggest expenses are car insurance and our cell phone bill. I switched car insurance companies today and saved $130 a month. Our cell phone bills are under contract, we are looking into another provider that will buy out our current contract to have a lower monthly payment. We don't have cable/satellite but we do have internet, we are on the cheapest package so can't downgrade but can cancel if need be. Our water bill is super low anyway, our electric is high in the summer but with fall and winter coming it will drop $100 a month. We canceled Netflix and Hulu, our kids complained and volunteered to pay it themselves, LOL!

Until this last year we have never depended on my income at all, unfortunately dh had an emergency surgery last thanksgiving and our 20% of the medical bills were almost $30,000. So while we have payed alot toward them it seems like we can't make a dent because there are so many, hospital, surgeon, anesthesia, etc. I know these would be the first I stop paying if we both become unemployed.

I am currently an office manager and have worked heavily in customer service for years. I have a lead with a major insurance company who is hiring several positions. I have already passed all initial tests now just waiting to interview. This position starts at the same salary I am currently making with the potential to start at a hire rate due to experience. The medical insurance they offer is considerably cheaper than what I pay through work so that will be a benefit. However the hours are different and I will have to quit my part time job which I love and will lose that income. So in the long run I will lose about $300 a month considering all factors but will have a good job in case dh loses his.

 

[crisi]

So for debt we have our mortgage, we owe about $40,000, interest rate is about 5.5 if I remember right. We also have a second mortgage, we owe $6000. We have 2 car payments, one is a new purchase but at a very good interest rate and pretty low payment so that isn't getting paid off. The other we owe about $2500. We do have 2 other paid off vehicles and would consider selling one if needed. We have 3 credit cards and owe about $5500.

Its been a tough year, hence the medical bills and we have really tried to get things paid down. So right now I would say we only have about 1.5 months of living expenses in savings. Outside of our mortgage, our two biggest expenses are car insurance and our cell phone bill. I switched car insurance companies today and saved $130 a month. Our cell phone bills are under contract, we are looking into another provider that will buy out our current contract to have a lower monthly payment. We don't have cable/satellite but we do have internet, we are on the cheapest package so can't downgrade but can cancel if need be. Our water bill is super low anyway, our electric is high in the summer but with fall and winter coming it will drop $100 a month. We canceled Netflix and Hulu, our kids complained and volunteered to pay it themselves, LOL!

Until this last year we have never depended on my income at all, unfortunately dh had an emergency surgery last thanksgiving and our 20% of the medical bills were almost $30,000. So while we have payed alot toward them it seems like we can't make a dent because there are so many, hospital, surgeon, anesthesia, etc. I know these would be the first I stop paying if we both become unemployed.

I am currently an office manager and have worked heavily in customer service for years. I have a lead with a major insurance company who is hiring several positions. I have already passed all initial tests now just waiting to interview. This position starts at the same salary I am currently making with the potential to start at a hire rate due to experience. The medical insurance they offer is considerably cheaper than what I pay through work so that will be a benefit. However the hours are different and I will have to quit my part time job which I love and will lose that income. So in the long run I will lose about $300 a month considering all factors but will have a good job in case dh loses his.

Should you get this job (and don't count chickens.....) can you live off one income with the debt payments? Can you live off one income without the debt payments? You need to do a cash flow analysis and figure out where you will sit if your husband is out of work. If you can live off your income with the payments, keeping the cash on hand so that you can weather a longer unemployment is nice. If you could get rid of some of the payments, and that would enable you to live off one income, then get rid of some payments so you aren't losing money every month. If you can't keep it going on one income with or without the debt, hang onto the cash to get as long out of him being unemployed as possible.

 

[SUSIEQ]

Until this last year we have never depended on my income at all, unfortunately dh had an emergency surgery last thanksgiving and our 20% of the medical bills were almost $30,000.

Good grief! What's your out of pocket maximum?