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Debt Ninja needs to provide information on the interest rate of his debt.
The best metric on how fast you should try to pay off debt is to ask \"could I earn more through investing in the market, or with a CD?\".
If the interest on his debt is higher than 10%, then he should put as much of a dent in it as possible.
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It's 7%. RTFA.
noticed it when I hit submit - no edit button to fix
KMFA
How much is that savings earning? 5 percent? 7?
Depending on what kind of debt you have you could average 15-25% interest rate on said debt.
Paying it down gives you an immediate return on investment of 8-20%.
BUT
If it is a low interest rate debt, like a 2% student loan then you are better off keeping the low interest rate and investing your money instead.
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Average savings interest rates are below 2% these days. Heck, it's tough to even find 2% on a CD these days.
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You are far better off reducing it that keeping the cash. Debt eats interests, and so getting rid of it increases your rate of savings. You'll lose $15k now, but you're save 15k alot faster with no payments towards a debt. Also, if any of it is credit card debt then if you pay it off and then have an emergency, you still have the credit card available to you to charge. So paying those off doesn't put you in a bad situation; in fact a good one since you aren't paying interest into your cards.
If you don't lose your job and suddenly have to live on 7,000 (after you've paid off your debt) rather than the 22,000 you have now.
Having debt is better than starving or doing without health insurance or a roof over one's head.
In this economy, keep as much of an emergency fund as you can and devote new money to debt reduction.
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That debt is costing you money. Get rid of it.
Weight the outstanding balances, interest rates and any tax implications.
Student loan interest can be deducted, so maybe dont pay that off right away. Same for mortgage, home equity loans, etc.
Concentrate on credit card or other loan debt that cant help you at all during tax time.
It wasnt clear if the OP had just student loan debt....if that is the case Id think about sticking with monthly payments. If there is other debt involved they might want to re-think what to do.
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I think taxes are a good point to consider especially if the money is getting a rate of return, but if the OP isn't in a higher tax bracket, although with 22k in savings it sounds like he is it might be better to pay down the debt.
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$15,000 in a student loan is not going to generate enough interest to surpass even a single filer's standard deduction. And to even get to the point where an itemized deduction using mortgage interest actually goes above the standard deduction, you'd have to have a pretty expensive house. If he's married, then it's even less likely this is going to be an issue.
I say pay off the debt.
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Student loan interest is deductible even if you do not itemize.
If he used the 22k as a down for a house the tax credit would more than enough of an offset on his taxes to be while and what if he already itemizes? But assuming he does the standard deduction you are right and keeping the debt is not to his advantage. In any case he would have to look at the amount he would make with the 15k added to the money he would get back from his taxes assuming he itemized anyways versus the interest he would pay.
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Why interest on the debt you already have. I recently paid off all of my debt and though that has reduced my emergency funds significantly. I can tell you I have a lot more money available to me now that I could use to rebuild my savings from not paying monthly interest charges.
Right now I am working with cash only purchases. I know that for some people that may not be an option, especially with larger purchases, but man it feels good looking at your bank account balance rising.
\"Why Pay interest\"
Sorry, I wish I could edit posts.
I had recently paid off my debt that was roughly 15k with a 5-7% interest rate and it was the best thing I have ever done. Ever month interest was adding upwards of $55. I to had a wedding/ honeymoon to pay for but I would fully recommend paying off the loan and continue to just save up and stick money in your savings.
Murphy's Law will happen to all of us and you don't want to be holding a bunch of debt when it happens. Then you would potentially not have any savings (emergencies, etc.) and a mountain of debt that you can no longer just pay off all at once. When the economy collapses (eventually), it's best to owe no one money. The faster you pay it off now, the quicker you can rebuild the savings.
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\"When the economy collapses (eventually), it's best to owe no one money.\"
If the economy truly \"collapses,\" it doesn't make a difference if you owe money or not. We'll all, including bank executives, be out in the town square bartering woven reed baskets for sheep.
But then he will have $20k to buy a loaf of bread.
Uh, Having a pile of cash AND a pile of debt would make it easier to weather short term hardship. In these uncertain times I choose to have the two piles.
How would a pile of debt help? Not following the logic.
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I believe the person is referring to having the pile of debt along with the pile of cash, so as the OP says numero uno. Not that they are saying the pile of debt is good and benefits them along with the pile cash, but you cannot have the pile of cash without having the pile of debt.
Does that make sense?
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\"On top of that, he's got a wedding and honeymoon to save up for.\"
Ah, the fly in the ointment.
Assuming he can't get the future Mrs. Ninja to take a major appetite suppressant on the wedding and honeymoon, he's probably better off sitting on the cash until those expenses are behind him. If he pays off the 7% debt with the cash, charges a whole bunch of wedding/honeymoon expenses on a 10-15% credit card, and can't pay immediately off that debt, then his situation is worse than it would have been had he used the cash to pay for the wedding and kept the 7% debt.
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Bingo! Perfect.
Then again... a 22k is about average, so he should have plenty of cash. And what is Mrs. Punch-Debt-in-the-Face bringing financially to these extrangances?
My wife's parents told us that we had 15k to spend on a wedding (granted, YEARS ago) and whatever we didn't spend we could have. We got married for next to nothing. We were engaged for two years (former military) so she spent a lot of that time pricing things. Beautiful wedding - and we walked away with cash.
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My parents did the same thing for us on a smaller scale -- gave us $5k to spend on the wedding. That was almost 14 years ago. We spent about $3500, had a beautiful wedding and reception, and used the extra $1500 to pay for our honeymoon to the Bahamas. Yes, we're a frugal couple!
Regarding this guy's debt and savings...I think it's a no-brainer. Pay off the debt and continue \"making payments\" but to the savings account. He will replenish that money in no time and if he's anything like me he will sleep much better at night knowing that he's gotten rid of Sallie Mae.
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That's good, well grounded advice.
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Carrying that debt costs money that could be saved by not carrying it. If the concern is that he won't have a sufficient \"savings cushion\" to get him through some life even -- which is a legitimate concern -- then he should pay off part of the debt, perhaps most of it, and continue carrying only a little of it. He could, say, pay off $12k of the debt. That would leave him with a $10k safety-cushion, which is not insignificant, and he'd be carrying only $3k of debt.
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That's what I was thinking, myself. If I had the option, I would pay at least 1/2 of the debt off- depending on what debt it is. (He mentions his student loan but what else? Credit cards?) The highest interest debt should be removed immediately. He would still have about $14K in the bank and only $7,500 potentially in debt. He just brought his debt/savings ratio down from 2/3 to 1/2. Paying off things helps his credit look better, as well as frees up money for the wedding. (Whatever he's saved in payments + general savings money per paycheck)
After the wedding, resume your normal savings schedule, with 1/2 the debt to pay off, still a hefty savings account for emergencies.
Arrrgh! \"some life even\" should be \"some life event.\"
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Let's play nice, children. The topic at hand is whether Ninja (I really hope this is his real name) should focus entirely on paying off debt or maintaining his savings. This is NOT about the validity of weddings and/or honeymoons. So don't get all in a tizzy.
My advice is to pay off the debt. $15,000 is a lot of debt to handle. Student loan debt is a lot better than say, credit card debt. I was in a similar situation, and I'm happy to report that we never came to squabbling over student loan debt because we both recognized that it was a necessary burden in order to obtain an education. Ninja and his spouse may start off with less in savings, but not being in debt really reduces stress off a newly married couple.
My other piece of advice is to cut costs in other areas, but to not ignore the debt. If he can't cut costs in other areas, especially with wedding planning and the honeymoon, pay off as much of the debt as he can.
I agree. Pay off the debt. 7% interest on the debt means that in this economy, he's probably paying more interest on the debt than he's making off the savings account.
Right now he's working with 22k (A number that sounds pretty awesome) if you forget about the 15k debt. Better off working with 5k you actually have with no rain clouds over it (and starting a new life debt-free). Get down to a zero balance and knowing that his actual savings is 5k doesn't sound nearly as awesome, but as a result he might plan smarter for his upcoming big expenses.
They can also look for ways to save more until the big day, cut all non-essential expenses etc.
That said, in response to the honeymoon and wedding crowd, I agree that lavish weddings/honeymoons are fairly impractical if the couple has limited savings or a fairly small income. I like the cost-saving ideas of keeping the guest list for the wedding fairly small, having a very casual buffet rather than a sit down dinner, and honeymooning within the US or better yet, within driving distance and taking a big vacation later.
A little side note: Perhaps look at having a smaller wedding and saving the money for something more enjoyable, like your honeymoon. My wife and I did that exact thing and spent most of the allocated Wedding money in Greece between Santorini, Rhodes, and Athens. The wedding was also more enjoyable and much more quaint and relaxing.
Well, he's spending $4,000 on the honeymoon, which indicates to me that they are staying relatively close to the US. If they're having a small honeymoon and a small wedding, it would be difficult to cut it down much more. He also says that future Mrs. Ninja has an unstable income (substitute teacher), so as a personal finance blogger, he of all people should know that you can't go for gangbusters with a wedding if you don't have a ton of money anyway. So if you've kept it small to this point, it's hard to cut any more.
True.
If the $22,000 is making more than 7% than keep the money in savings. If it is not, pay it off immediately. The payment you are currently making to debt could then be made directly to your savings.
I find it ironic that the guy is worried about all this and is still planning on a $4000 honeymoon and is getting married and has not discussed or looked into how she is going to be with money. Here is some advice that has nothing to do with choice uno or dos. Talk to your fiance about money and her history with it. Discuss her feelings on debt, risk, money management. I would go as far as to have both of you get a credit report and go over it together. It amazes me how people who are going to join every aspect of their lives and possibly procreate are afraid to sit down and have an honest assessment of their financial priorities. Every report I read about divorce is money is one of the leading causes of divorce. Why wouldn't you find out if you are compatible before you end up with child support payments and her taking half of your savings and you still having the debt. By the way, this is why I strongly endorse a prenup for anybody who gets married. You need to have a plan for both of your security if things do not work out. If it lasts forever you have no worries because the prenup won't be enforced. I would also look at revising the prenup at specified intervals.
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It's easy - If he's going to need that 15K in the near future, but won't be able to secure as good of an interest rate - then he shouldn't pay it off. If he can get a better than 7% interest rate, then he should pay it off, and re-borrow (if needed) at the lower rate.
I personally would pay off the debt. I hate having debt, and I'm okay with living on very little money. Plus, that 7% interest means that the debt just keeps costing him more and more every day.
On the other hand, we're still in a shaky economy. He could get laid off at any point, depending on things like what industry he's in. It may make more sense to stay prepared for emergencies.
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I'd pay off the debt. Wedding and honeymoon? Seriously! Where is it written that spending twenty grand on a wedding is compulsory? Just because she says so? Well, if She Who Must Be Obeyed has veto power over your financial strategery, lay out the choice for her in terms she ought to understand.
Choice 1: Cut rate wedding with honeymoon within driving distance, and start the marriage clean.
Choice 2: Lavish affair with big-ass party and honeymoon in Cancun, and $15,000 (or more) in various debt that eats into your disposable income, affects family planning decisions, etc.
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He doesn't say he's going to spend $20K on the wedding. In fact, he states that so far, he's only paying $4K for the honeymoon (\"Not having to pay for the actual wedding day\"), but wants to have a cushion for the other various expenses of marriage itself.
And even though this doesn't seem to be the case here, if SHE says she wants an exorbitant wedding and HE agrees, they both made the decision together, good or bad. It's not fair to gender-blame when there are 2 people involved in a decision. If he can't tell her no, or find a compromise, the problem is more about communication than money.
I think you misunderstand. I don't think the wedding is going to cost a total of $20,000. Note that he has a wedding and a honeymoon for which to save. So it's unclear as to how much the wedding is going to cost, but if he only has a $5,000 cushion, that would certainly make it very difficult to plan a wedding and a honeymoon.
He can do both - pay off some debt and have a honeymoon. The problem is that if he pays off all of his debt, he only has $5,000 in savings and his honeymoon is going to cost approximately $4,000. My advice was to pay off part of the debt, begin planning the wedding, and pay off more debt as the wedding costs begin to take shape. If you budget $400 for a cake, and only pay $300, put the other $100 toward the debt, for example.
Trust me a wedding and honeymoon can easily cost way over $20,000. We are about to get married and instead of my parents giving us the money for our new house, they insisted on throwing us the wedding of my childhood dreams. Right now with the honeymoon (a gift from his family which is awesome!) we are somewhere around $25,000 and the kicker, this is for only 50 guests. A break down-Ceremony, reception, flowers, dj, clothes, photographer and all the other great wedding stuff is just over 15,000. Our honeymoon is to Europe (but a gift to us) is 10,000 (we are going for almost 2 weeks). Now if we had our way, we would have been going to some tropical island, had just our parents present, got married and went off on a nice tropical honeymoon, total cost including our honeymoon, maybe 10,000? The op just needs to pick 1 and go with it.
You're missing my point entirely. Yes, a wedding can cost $20,000. But since he hasn't yet begun to plan it or pay for it, he can control the cost. He doesn't have to spend $20,000 on a wedding. The decision to do so is entirely in the hands of him and his future spouse.
No, the decision is with his future spouse. Most men really don't care what the wedding is as long as there is food, drink and said \"i do'.
By saying \"most men\" you acknowledge that the decision could, in fact, lie also with him as well as his spouse. There are a great deal of men who want to have equal say, and who care.
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I commented there when the post went up, but I'll repeat myself here.
I'd rather have a hefty emergency fund in this economy before I start aggressively paying off debt. My hubby and I are building up a $20,000 fund (about 12 months of expenses) and then we will start really pumping the dough into our car loan. If we depleted our funds on our debt and then ran into a true emergency, we'd either have to put it on credit cards (20% interest) or beg for a personal loan (good luck getting one and good luck getting the kind of rate we have on hubby's studen loans).
Then again, we're already paying extra each month ($100 towards car, $230 towards mortgage) so it's not like we're just sitting on a mound of cash for no reason.
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Thank you! Exactly what we've worked on. You can accelerate your debt payoff, but still have that cushion while the economy is in such turmoil.
Agreed. Being unemployed for two years destroyed my savings, so my first priority is rebuilding a safety net. That and helping the g/f pay off her truck.
My thoughts exactly. I'm in a similar situation except my student loans are large (~$30k) with less interesting (3%) and my savings are much smaller. I'm also trying to pump more into retirement funds, and I decide to prioritize that + emergency savings rather than paying off the student loans.
I was aggressive about paying off cc debt, but once that was taken care of, I shifted 80% of that energy & funds into savings, with only minimal extra payments going towards the loans. They should be paid off in 5 years, and I'm fine with that.
I used the same rationale - I'd much rather have some money for emergencies, even if it meant significant (but low interest) debt for the near future.
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Yes. This is what everyone above is missing. If you pay off debt at 7% and then suddenly have to reborrow at 20%, you are not in good shape.
Paying off our debt would free up about $500 a month to rebuild our emergency fund, but God forbid we needed money RIGHT NOW, we'd be up a creek without a paddle and need to borrow. Which would put us right back where we started, except now with a higher interest rate and no emergency fund.
Unfortunately, Dave Ramsey is right in all cases. Get rid of the debt because it is in control.
Have a low-key wedding. Delay and save for the honeymoon. You'll regret going into more debt to pay for those items. Ask anyone who spent a lot of their own money on their wedding. Bad idea.
Paying off debt is liberating. It really is.
Find a middle ground that you can live with. I'm in a similar situation, only I'm still trying to build savings and pay off debt at the same time. I know that the debt accrues more interest than the savings, but I also know that if I have no savings, and something happens where I need money, I'll have to put it on a credit card and end up with *more* debt. So I put a little in savings and pay as much as I can to the debt. The OP could apply this same concept and maybe pay off half the debt now and still have quite a decent cushion in savings. He'll pay less interest on the debt in the long run if he does this.
Amen. Pay down your debt moderately, but keep a nice fat savings account in case of emergency.
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I've always been told to pay off your high interest debt and then work on your savings. Most savings accounts, even high yield accounts are only earning 1 - 1.5% at the moment.
Think of it this way — if you had only $5k in savings right now, would you borrow $15k just to have an extra cushion? ... because that's what you're doing.
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Wow, that's a great way to put it.
Get rid of the debt. I used almost all of my \"emergency fund\" to get rid of my debt. I had maybe $100 left. However, once the debt was paid off I was able to put the money back fast because I didn't have debt payments.
Besides you can always go back into debt, as Dave Ramsey says.
Yes, however, if he had to return to debt, instead of getting the fairly good 7% APR on the student loan debt, he'd have to probably borrow at 13% or more. If he doesn't have enough cash cushion to weather a moderate financial emergency, he'd probably be better off keeping a fairly sizeable amount stashed away.
If he wants to reduce his student loan burden, I'd suggest maybe paying down to the balance to about $5k, which means he still has about $12k in the bank.
Not to mention, in a financial emergency, you can always ask for a forebearance or special terms from a student loan company (perhaps even change your repayments to an Income-Contingent plan), but other lenders are far less accomodating.
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I certainly believe that it's important to build up an adequate savings cushion before tackling debt in earnest, though if I had $22k to pay off $15k in debt, I would do that without a second thought. $7000 is below what I'd prefer to have, but enough to get me by in most short-term hardships. But I agree with the reasoning, and I definitely have done this myself. Having a cash cushion allows you to maintain your debt attack plan without it being killed by emergencies - I have had one unexpected $500+ hit in each of the last 3 months but because I have enough cash to cover them, I can stay on target with my debt repayments.
There is also one thing that seems to be glossed over...it appears the $15k is student loan debt, so the 7% interest rate is reduced if he is deducting that on his taxes. If my sole debt was a student loan/mortgage with tax deductible interest, I would probably ramp up my payments to pay it off much sooner, but would probably not bother paying it off in one lump.
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If you have $15,000 in debt and $20,000 in savings, you do not have a cushion of $20,000. You have a cushion of $5,000.
Good point. Thanks to John Lanchester, I have a much better idea of assets/equity.
Good point - The money isn't really yours. And if you adjust for the 7% interest, you have even less of a cushion.
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I found myself in just that situation about a year ago. Paid off everybody and enjoyed no payments for a while... (then I lost my job and was happy as hell I had all this unused credit for the interim)
What type of debt does the op have? If it is just student loans, if owuldn't be wise to pay them off right away. You get to deduct the interest and what the Op went to school, the interest could be ridiculously low like mine, 2.5%. Now if it is credit card debit, pay it off asap before the credit card gods come and smite you with lowering your credit line or jacking up the interest rate.
Read the article. It's student loans.
Yes he does, but all he says he could pay off this student loans tomorrow, the op never said this is the only type of debit they are currently carrying.
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I am in a similar boat with 20K in savings, 5K in debt, and a baby on the way. The best course of action is to pay off the debt and transfer the money I was paying into our high-interest savings account. Any thoughts out there?
I hope you have fantastic insurance and a very, healthy baby. God forbid Jr ends up in the NICU or mama has complications, you could rack up a LOT of medical bills very quickly :(
So I have a similar situation. I have about 40k in cash, but I have a 190k mortgage (5.5% 30yr, 29 to go) and 50k in two car loans (25k at 4.9 and 25k at 5.15, wife's transportation and mine).
That is the total of my debt as I pay off my credit cards in full.
I am having dental work done that is going to sink about $9k of the cash. I have the rest in a checking account that pays 4.25% on the first 25k. Granted I have to pay income taxes on that income, so its more like 3.5%. I'm willing to eat the 1.5% spread to keep the vehicles financed and have a good emergency fund in case of unemployment.
Wow, if you don't mind my asking, where do you have a checking account that pays 4.25% on the first 25k? I'm getting next to nothing on both my interest-bearing checking and savings accounts.
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Why not pay it off and put the payments that were being made into savings?
Because his payments on $15,000 of student loans is probably around $200 per month. To re-accumulate $15,000 at $200 per month would take around six years. He has stuff he has to take care of in the near future. Instead of paying off a fairly safe debt (his student loan) and then putting himself at risk of accumulating new debt (most likely credit card), he can just hold onto his savings and use it (borrow from himself) if he needs to.
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I can't believe how simplistic and short-sighted most of the \"get rid of the debt\" replies are, especially in this economy with under-employment approaching 20%. Yes, the immediate gratification factor of paying off all of your debt FEELS GOOD . . . but what happens when your company downsizes the next week and lets you go and you're left to stretch out your remaining $7k to live on for the next, what . . . 6, 9, 12 months?
Risk management is a BIG part of managing one's finances, and in this case, unless the reader has 100% certainty (do any of us?) that he cannot or will not lose his job, keeping his savings reserve as high as possible is probably a good idea (common opinion is 3-6 months, but in this environment more is probably better).
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As someone in exactly the position you described, after 9 months searching for a job, I am glad as hell that I kept a large savings account available.
Pay down some debt while you can but not at the cost of your emergency fund unless you are absolutely assured that your job is safe.
I think like you. $20k would just about cover our mortgage and most of our bills for a year if my DH lost his job. In this economy, he's not likely to find as great a job as he has now right away, so we have to plan for a big ol' disaster.
Why not compromise? Keep $15,000 in savings, and make a $7000 dent in the debt.
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Depends. I consolidated my undergrad loans in 2004 and the interest rate is now below 2% because of reductions for auto-pay and on-time payments, so there is really not much incentive for me to pay those off quicker.
Some other loans for me and my wife are at higher rates (4% and 6.8%), I might try to pay them down before saving more (I do have a decent amount set aside in an ING account, not sure if I'm going to tap into that to reduce debt or not.)
And also, as someone else mentioned, student loan interest paid can be deducted (even if you don't itemize).
The issue isn't just how much he's losing to interest, it's how secure his job and housing are. If you lose your job you're not going to get to borrow an additional $15,000 to keep you going while you job hunt -- that $5k isn't going to last you very long.
Personally, I'm confident I could get a new job within 3 months, so I only need a $6k emergency fund. If his job situation is at all precarious (and who's isn't in this economy) he needs enough cash on hand to support himself till he gets a new job.
Yes he's losing money he could be earning interest on (or making more through investments), but investments mean nothing when you can't pay rent.
It really all depends on the math, right? You'd have to answer some questions, so I don't think there's a one-size-fits-all answer.
Is the debt on an income-producing asset? Is it on an appreciating asset? Is the interest on the debt tax-deductible? Do you have other resources (e.g., family, friends, neighbors) who can help you out in the absence of a savings cushion? What's the most interest you can squeeze out of the money you have in the savings cushion?
I don't think you can answer the question for yourself individually until you get those numbers.
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In addition to what everyone else said (debt costs money, investments vs. debt apr etc...) not having debt does crazy things to you psychologically. I did the Dave Ramsey thing, and when I see someone pull out a credit card to pay for something I have to resist the urge to tackle them and rip the card out of their hand. You can't understand the feeling under you've been to the point of being crushed by debt, and then paid all of it off.
Just hope that they are like me. I pull my credit card out for EVERYTHING! It earns me rewards, and I pay it in full. I enjoy getting a few hundred dollars a year for nothing.
Same thing with us. The only thing we don't pay with our credit cards is our mortgage. Everything else goes on the card and we pay it off every month.
*high five* there's nothing wrong with using your credit card to pay for everything as long as you're responsible.
Pay it off... get rid of it! Debt sucks.
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Ha! This will never happen to me, but if it does, I would pay off the debt right away. I could build the savings back up and not having the debt hanging over my head would be awesome. Worth every penny.
However he got the $20,000, it is a major gift he can use to get his life simplified and let him concentrate on his upcoming marriage etc, WITHOUT DEBT. The OP may never have this chance again and if he does anything but pay off the existing debt, he's taking a big risk that the debt will get even bigger and really complicate things.
Is it possible to get a lower interest rate on that student loan? My brother, who is very well off and has at least a year's expenses saved, has a 1% or 2% rate for his and is therefore paying it off very slowly.
In addition to the other factors everyone else has already noted, it might also be worth considering how soon the wedding is, how much Debt Ninja is able to save each month (is that $22K growing?), and Ninja Spouse's own financial and debt situation. And, of course, Ninja Spouse's views on all of this. 8)
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The realization that it was student loans gave me pause. I'd have to know more (and I'm not gonna follow the link to do so), but its not as simple now.
However, he also has the option of partially paying down his debt. Reduce how much interest accrues in the short term, by paying off as much debt as he can after comfortably budgeting for his wedding. That prevents him from going deeper in bad debt (credit card for wedding, honeymoon), after paying off his good debt (student loans).
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PAY OFF THE DAMN DEBT!!!!!!!
I would, and have, definitely pay off the debt, then use the money that was going to interest payments and funnel it to savings to rebuild the cushion quickly (don't spend it away!). You can not earn nearly as much interest on savings as you pay on debt, so it makes no sense to keep debt around unless you need the cash right now for something absolutely necessary (car, house repair, etc)
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Considering how crappy interest rates are right now for savers you are much better off paying down the $15k at 7% than keeping the $20k at under 1%.
We trashed our savings account to pay off my private student loans that were running at 7%, but are letting the federal loans (at 3.25%) ride. I'd suggest something similar. If he can roll that debt down to a lower interest rate, option one is a better bet. Otherwise, just pay it off and walk away. Take the money that was going towards the loan and put that in savings.
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Basic economics tells us that if the cost of the interest on the debt is higher than the return of the investment (savings) then it's a bad choice to carry the debt.
Even if you are making more on the savings than your paying on the debt, chances are you'd be making more still on a smaller savings with no debt interest being deducted.
There is, however, something to be said for having an emergency fund.
Take 3 months worth of expenses, and put them in a high yield savings account. Put the rest towards the debt. Then pay off the debt by making the same size payments you've been making. Then when the debt is paid off, keep making that \"payment\" to your savings account.
I don't mean to sound like a jackass (no, really, I don't - it's like a natural talent, it just happens), but if Debt Ninja doesn't have a solid grasp on this basic economic theory, maybe \"personal finance blogger\" isn't a good career choice for him, or for his readers.
Its all about cash flow. Just because you CAN pay off your debts at any one time doesn't mean that you SHOULD. Having the cash provides greater flexibility to react to unforeseen events and take advantage of opportunities that may arise and require liquid assets. $5,000 in the bank is nothing nowadays. However, $22,000 is something.
In troubled financial times, cash is King and liquidity is its queen.
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Whittled $20k down to $6k, said screw it at the beginning of the year, and as soon as my tax return came I pulled the difference from savings and wiped my debt from the ledgers. It's awesome loading up Mint and seeing only $1.68 in outstanding debts gahaf
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While marriages have a chance of ending short, debt will stay with you for the rest of your life. Considering an earlier article had an infographic about how long it would take to pay off debt and was incremented in units of 1000 years, debt definitely does not part with you when you die.
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Be careful who you take advice from. Lots of responders here in the comments section who have more debt and less savings than you and its unwise to seek advice from such people.
\" He who takes advice about his savings from on e who is inexperienced in such matters, shall pay with his savings for proving the falsity of their opinions\"... The Richest Man in Babylon
Read the book.
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Depends on the debt. Tax deductible interest like student loans probably aren't worth paying off early. Credit card debt on the other hand is a no-brianer.
7% is borderline for me. Given the current state of the economy, I'd be hesitant to deplete my savings right now, especially if I knew I had big ticket expenses coming up. If the wedding and honeymoon are expected to cost more than $22k, I'd hold off on paying down the debt because even a 7% interest rate on student loans is lower than what he'd be paying for credit card debt.
If he feels very confident that his job is secure, I'd figure out how much I can pay down and still have around $5k in savings after the wedding an honeymoon.
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Pay off the debt. A wedding is not a necessary expenditure; nor is a honeymoon. If you truly love each other and want a future together, you'll still get married *without* all the look-at-me fanfare, and put that remaining $7,000 toward something meaningful. You can always have the party or take the trip later. It's the *marriage* that should be the priority... not the wedding.
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Pay off the debt...and this, \"On top of that, he's got a wedding and honeymoon to save up for.\" Weddings don't make the marriage.
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Faced this question, this year. We paid off our house, and thus took a major hit to our liquidity. It was scary, and in honesty, driven more by looming uncertainty about my job than anything else. However, I'm now more than ever convinced it was the right thing to do - we're recovering our savings pretty fast, and making money on that instead of paying the mortgage. Get rid of the debt, you'll be glad you did.
I'm in a similar boat, although the numbers are different. My primary concern is possible expenses - I'm a homeowner, so I need a few $k in savings to give me a cushion in case I need a new roof or the water line breaks or whatever. If we were renters and didn't have any major likelihood of expenses, I'd pay it off in a heartbeat. However, in my current situation, I'm not comfortable letting my savings dip that much, because I'd pay off the CC, then the roof would leak, and I'd put it right back on the CC and be boned again.
Bottom line: It's all a game of chance, albeit a calculated one. He needs to weigh his desire to pay off debt and it's financial payback against the possibility of needing money and not having it at hand.
\"he's got a wedding and honeymoon to save up for\" - so what's most likely to happen is that he'll pay it off and then rack it right back up again when the fiancee sees that he's suddenly got plenty of available credit.
Or he'll pay very little of it off, and will blow $18,000 on the wedding & honeymoon. Then he has no money and $15,000 in debt.
My advice: Pay off at least half of the debt, set a tight wedding/honeymoon budget, and put money away in savings. The big expensive wedding might impress your friends & family, but in the end, it's really not worth it. My wife and I scrapped our several thousand dollar wedding plans and had a party wedding in our own back yard. We had a weekend block party out of it, and it was an absolute blast that people still talk about. The whole thing cost us under $2k and most of that was food and booze.
I'd ditch the debt. My parents lived their whole lives, and continue to do so, without any type of 6 month safety net and managed to get by fine. Their debt, however, has left a dark shadow hanging over their finances for a long time...everything costs more when you have debt that has affected your credit score.
As a person with no savings and a ton of student loan debt, I'd rather get rid of the debt burden. I'd rather be in a situation where my car breaks down or something and I don't have money to fix it than to be in a situation where I suddenly can't afford my student loan payments and my credit goes to shit for 10 years.
At the very least, I'd pay off HALF my debt and still have a large amount of savings available.
If you pay off your debt, it's that much less you would have to save in emergency funds. If this were a revolving line of credit, with low interest....then maybe you don't pay it all off and close the account. But since it is an education loan, and you would stil have a small chunk (about $7000), and you would have zero debt after that...I'd pay the the thing off.
If your $15K of debt were credit card debt I'd say yes, get rid of it. If your $15K is private student loan debt, get rid of it. However, if its regular student loan debt, subsidized by the government, keep it and pay on time, perhaps even ahead of time. You'll lose some money on interest but if you have an emergency and have to take on credit card debt to cover it you'll be paying far more than 7% interest.
Student interest debt is mostly tax deductible IIRC, so the calculation is a bit more complicated than it may seem. If you are looking at making a major purchase keeping the student debt may make more sense than taking out a new loan at the same rate as it would not be deductible. The individuals circumstances matter a lot here: An individual driving an 11 year old car may be looking at having to purchase a new car in the near future, and a person in a high tax bracket may be saving a decent amount of the interest off the federal and state tax bill.
The question becomes what is the true cost (after taxes) of the interest, and how does this effect future purchases. Sure you may \"earn\" more in the short term paying it off, but if the trade-off in non-deductible debt in a year it may not be worth the trade-off.
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No question at all. I would choose to have zero debt. OTOH, I also know that thanks to my credit union that I have a substantial emergency line of credit that wont go away just because I don't use it.
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If low interest credit is available to you then pay off debt first.
At 7% interest on $15k, you're paying $88/month in interest alone. Your $20k in savings is accruing peanuts in interest.
My savings account is perpetually drained, every spare dollar at the end of the month goes to paying down my mortgage. I have a $30k line-of-credit available to me, that is my safety net.
Thanks to this strategy I've managed to pay off nearly $50k of debt (credit cards, student loans, and now working on mortgage) in the last 2 years and I'm far ahead of where I would be if my priority was padding my savings account first.
It is obvious he either didn't take any math or economic courses during his runup of student loan debt.
Since he can't see that the 7% is wasted $$, maybe he should go more in debt by buying several lottery/powerball tickets every drawing.
The guy is doing the right thing. He is managing risk. His student loan is a known entity, he knows the terms.
His future is full of unknowns. Having $22,000 in cash on hand makes navigating through unknowns a hell of a lot easier.
If he was to wipe out his savings and debt, and then some of the unknowns turn out to be very negative and he has to take on more debt, all of a sudden he is dealing with new terms. And currently, the new terms on debt don't appear to be all that friendly. Definitely not as friendly as a student loan.
He should keep the cash cushion until things have settled and his life is stable.
DEBT FREE in about 1 click of the mouse. As a family who just paid final payents on over $100K in student loan debt, I would kick Sallie Mae to the curb with the quickness.
I'm frequently in this situation. [Self employed with erratic work and very slow paying customers]
However, my debt is a credit line on my house, so I can pay it down and re-borrow again as needed.
If the OP has other sources of credit at reasonable rates, then pay off as much as possible leaving an emergency fund for quick money and use the credit for larger short term needs.
Remember that the student loan cannot be used again as a source of credit.
If the OP has no other good sources of credit, then the emergency fund needs to be much larger. The interest being paid to keep the emergency fund instead of paying the loan is the cost of keeping a safety net.
[I was in this state for a while. My safety net grew by careful cash management and not upping my lifestyle when I had lots of work. My credit line can be paid down when there is cash and used again when I need it, so I keep a lower emergency fund than I used to. I also have enough equity that the credit line is unlikely to be lowered even with the bad housing market]
Pay off the debt. I don't know why people get so emotional over a simple math problem.
If it's get rid of debt forever and all future debt then you wouldn't really need the savings account. If it's just clear your debt once then the savings account is needed for the future.
$5,000 is a pretty good honeymoon. Maybe they should rethink how much they're spending on that.
We had a pretty fantastic honeymoon for around $3,000. Ten days at an all-inclusive Caribbean resort. What a great time and great way to start off our marriage. I wouldn't trade the experience for... well, for $3,000.00 + 2 years of current rate interest.
Much better than staying in a Best Western in some po-dunk town with-in driving distance.
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I have my own debt but in my opinon:
1. Have a smaller wedding, do your best to keep the costs down and keep it basic.
2. spend 1500 and have a nice honeymoon
3. come back and pay off as much debt as you can't screw the idea of a safety blanket, it won't save you very long if you have a issue and it won't pay off that debt for you. The better plan is to pay off the debt so when you do need the blanket you won't need as much help or have as many crazy collectors making your life or your new wife unhappy.
He is not paying for the actual wedding.
If the savings cushion is over 12 months, use the remainder to pay off the debt (then recalculate - don't go under 9 months though).
You will have worse credit problems if you miss 1 rent or utility payment.
Calculate your monthly spending, multiply by 9, and don' t let your cash balance go below that.
(You aren't going to stop doing stuff if you lost your job tomorrow - and sometimes unemployment can screw up so you might not get anything for 3 months even if you would be approved).
It might be $10k with $5k of debt. or $15k with $10k.
I don't know your situation.
Seems straight forward. Nowadays a savings account earns essentially noting but the debt is basically giving away money. It would require discipline but pay off the debt and do an 15k IOU to the savings and start aggressively building it back up.
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Blow the debt away and build the savings.
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Cash is king.
he's paying 7% on that debt... I doubt he's earning that or more in that savings account. If he could switch that to a 0% interest debt then he'd be fine. Otherwise, I'd pay the debt and resume the payments to the savings account to build it back up.
I would not pay it all off using my savings. Here's why:
These savings are his emergency fund, if it were an emergency, let's consider how it would play out:
22,000 can pay for a lot more months of food, rent, health insurance and minimum payments on that debt than 7,000 can. In this economy, reducing one's emergency fund is a fool's bet. At 7%, his debt is costing him $1540 per year, to reduce one's emergency fund by $15,000/68% to save $1540 per year as well as taking him well below 3-6 months recommended for such a fund --that makes no sense.
Perhaps on paper paying off the debt makes sense, but we don't eat paper and we can't live under a tent made with credit card statements showing we've paid off our debt.
Be practical first, be perfect later.
In the meantime however, he should direct a lot of money going to savings into debt reduction
I'd do a mix. I'd pay most of the debt and just budget well on the wedding. You would be able to add to your savings more after eliminating a good chunk of the debt. By the way... my wedding dress is for sale... very modern - very affordable. haha
Normally, I would be with you on that one. But that was before the credit crisis hit.
A couple years ago, this would be a no brainer... Pay the debt. Because he would no longer be paying interest, and he would still have that money available to him in the form of credit if he needs it.
However, since the credit crisis started, the game has changed. It seems that many people who pay off their debt are seeing their credit lines slashed as a result. So there's no way to say whether the OP would be able to maintain the same available funds while paying off his debt (which used to be the case).
Therefore, my recommendation to the OP would be to pay off as much as you feel comfortable with and keep liquidity in mind. That is to say, if he has the option between paying a 7% credit card and an 8% student loan, it might be best to go with the credit card, as that will leave him with easy-to-obtain credit, while a student loan payment will not directly free up credit if he needs it.
Need to look at taxes as well. Does the interest write off from the student loan have a material impact on tax rate percentage? If it contributes to knocking you down a tax bracket, then it might be worth keeping the debt around as long as the interest rate stays constant.