Today we’re going to talk about the age old question: Will crossing your eyes too much cause them to get stuck that way? No, not that one. Never that one on a Monday. We’re talking about the other age-old question: Should you save while you’re in debt?
Over the weekend, Sally got ahold of the remote and changed the channel to a Suze Orman telethon on PBS. And like the normal humans that we are, Johnny and I watched it for 20 minutes. And as it inevitably happens anytime a personal finance expert is speaking to the masses, someone asked, “Suze, I have credit card debt and school loans. Should I be saving while I pay down my debt?” So how did Suze respond? Well, let’s take a look at how she and Dave Ramsey feel about saving while paying off debt:
Suze doesn’t have a hard and fast rule about saving while paying off debt. If possible, though, she usually advises both. If a person can pay off debt quickly while also investing in retirement and saving for a rainy day, that’s the ideal. Suze recommends paying off the highest interest debt first. Sometimes she even recommends selling your home so you can put money towards savings while paying down your loans. When it comes to saving for the future, Suze doesn’t mess around!
On the other hand, Dave has very specific guidelines for saving while paying off debt. Before getting started with the debt-payoff process, he recommends having a $1000 emergency fund in place. And that’s it. Until you’ve got all of your debts paid off (aside from your mortgage), Dave recommends putting every extra cent toward paying off those loans. You may be tempted to invest in retirement or ramp up your emergency fund, but Dave is wagging his finger and saying, “Don’t even think about it!”
What We Did
When Johnny and I started paying down our debt, we first made sure to have an emergency fund in place. We didn’t feel completely comfortable with only having $1000, so we aimed for about $3000 instead. Once we’d calculated our debt-payoff timeline, we compiled a budget that would allow us to save $500 a month — if all went according to plan. But we made paying off our debt the first priority. Even if we didn’t save hardly anything some months, we made sure to always put a dent in our loans. We also made the decision to contribute up to the employer-match amount for Johnny’s 401k.
So why did we choose to save? Well, at the time that we were paying off our debt, we expected that a job relocation was in our near future, which would require more than just $1000. We also didn’t feel like $1,000 was enough of an emergency fund to cover a real emergency, such as the root canal Johnny would need just a year later.
Even though we put money in savings and invested in retirement while we paid off of our loans, we think each person’s situation has a different answer. Johnny and I only had low-interest student loans to pay off, so putting some of our money toward savings didn’t cost us much in debt interest. If we’d had high-interest credit cards to pay off, we probably would have put every extra cent toward paying off debt until the balance on those credit cards was zilch.
So if you’re paying off debt and trying to decide whether to start saving, our answer is that it’s up to you! But hopefully these perspectives will help make the decision a little easier. If you’ve been there and paid (0r are paying) down that debt, how did you approach the debt vs. saving dilemma?