Wednesday

Debt vs Savings

This is a somewhat continuation of a discussion going on in this post's comment section.

There has been some serious debate around the pf blogosphere regarding the subject of savings versus paying down debt (I talked about it before). On one hand, people suggest paying down the debt if the interest is higher than what you can gain with investments/savings or if it makes you feel better; on the other hand, people suggest building up savings for an emergency, for the long term, or for your comfort level. In the end, though, what it almost always comes down to is the comfort level of the individual. No one rule can fit everyone's situation or comfort level.

Let's look at this in example form. If a person has a family that is dependent on their income or if they are in a situation where job losses are common (major manufacturing comes to mind), they are going to want to have an EFund that will tide them over for the time that they are without income. But, if the person has no dependents or is in a stable career (say, like govt or military), they may not need a large EFund.

Looking at my situation, right now, my goal is to build up an EFund. I absolutely want to pay down the credit mofos, but I need the security of the EFund, given the potential volatility of my new job. So, I am going to focus on that. Additionally, looking beyond just the EFund, I want to maximize my 401K contributions (and poss. Roth IRA) while I am making a good salary so that it'll make up for a time in the future when I might be making less money (school or low paying job in new career).

I'm planning on automating my EFund savings into a 5% savings account. I already pay the minimums to the credit mofos at 0%. Any extra money (quite a bit, actually) gets put into a separate Credit Card EFund, where it can earn some interest. Essentially what I'm doing is saving the payments to earn interest of the money and creating a temporary EFund that I can access should I need to.

Thoughts?

Clink

19 comments:

Miguel said...

Along with the great debt vs. saving debate is the CC as strategic capital vs. never carry a balance debate. Some people see CC's as a nice way to use OPM (Other people's money) by using special offers, balance transfers, gift points, etc. I am not one of those people. I want that debt gone. Read the fine print - I bet it says they can jack the rates up or change the terms whenever they want. You're playing with fire -one payment and blam - gotcha.

I'm all for simplicity. I don't have time to play games with CC's. Would rather focus time & energy in other ways. So, my approach is pay those suckers off as quickly as possible, never carry a balance, and only carry 2-3 of them at most.

P.S. I do get reward pts which has come in handy, but that is incidental, not strategic. I don't have to carry a balance to get the pts.

Clink said...

Miguel - I can agree with you on getting rid of the cc debt all together. It's "fun" to gain money using the CC (arbitrage?), but for all the work...

Tired of being broke said...

I am in that situation now and am doing both, saving while paying down debt at the same time. I need an e-fund even a small one so that if I loose my paycheck I do not have to revert to living off the ccs. currently I have a little over $1400 in a cc. It makes me feel better at night especially after the share of emergencies I had towards the end of 2006.

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