Question: Why not use savings to pay off debt?

On my last post, the CFO Mom asked a question in her comment: “How do you resist the urge to not use savings to pay off debt?”

I thought I’d take a post to write a response, as my answer to her comment could probably have gone on for quite a while. 🙂

So, here’s the deal – we currently have about $18,000 in a Money Market account. This is comprised of three different “funds” (I break them down in a spreadsheet that I update when we add or take money away from the account):

  • House / Car fund
  • Debt Eradication
  • Emergency fund

The House / Car fund has about $9,000 in it. This money came from selling our house, which somehow resulted in us making a bit of profit! Any interest we make off of the entire account goes in that category each month, but otherwise, we are not adding to this category.

The Debt Eradication fund is where I hold the money that I snowflake each month which will then get sent on as an extra payment to H’s Student Loans each month. Currently it has about $3,000 in it, and it is destined for that extra payment which will happen in the middle of the month (after the minimum payment is processed, so that we get the maximum amount of the payment going towards the principal).

The Emergency Fund has about $5,700 in it, because that was the number we needed to bring the total amount of money in the account up to $15,000 (minus any funds being held for Debt Eradication). This really means that even though we’ve earmarked $9,000 in this fund for a house or car, we are ready to use it as an emergency fund, if needed.

Now, to actually answer CFO Mom’s question…!

When H’s job was in question (the word on the street is that he is being recommended for hire – in the same position he’s been in for 8 years, but will now actually be a more stable position, yay! – still some hoops to jump through, though, so we’re not celebrating yet), we sat down and discussed how much cash we wanted on hand in case things went badly.

We figured out that if we cut out everything that we could (and even stopped student loan payments, which we could, since we’re technically paid through 2017 at this point) if things went south, we were comfortable with the number of $15,000.

So we weren’t tempted to pay down debt with it because we knew we might need it for something else – but this does bring up another thing that’s been floating around in my head for a while. Now that we’re pretty sure (fingers crossed!) that H’s job is relatively secure, what to do with that $5,700 that we’ve had sitting there for emergencies?

Do we use it for paying down debt (which was the original plan)?

Do we hold onto it to keep a nice-sized emergency fund because that $15,000 is awfully comforting to have around?

I don’t know yet, but as I hinted in my last post, house-hunting has come onto our radar, which I was certainly not prepared for…. Another post on that in the next couple of days! But I will say that I’m currently leaning towards going ahead and putting that $6,000 towards debt.

To muddy the waters, I’ve actually been considering holding on to that $3,000 earmarked for Debt Eradication this month. I mean, then we would have $18,000 and that would certainly be better than $15,000 if it came down to needing a downpayment…. Sigh. Our priorities are currently undecided, which is an uncomfortable place for me.

I hope that answers the question… at least for now. 🙂

Advice? 🙂

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4 thoughts on “Question: Why not use savings to pay off debt?

  1. Your thoughts sound exactly like what’s going on in my brain! I keep going back and forth. I think I’m waiting to see if my job gets renewed past 2018. One of the things that I keep telling myself that I’ll save so much money in interest that it’s almost like an investment. I also think about if something crazy happens, that’s one less bill I’ll have to worry about. Can’t wait to read what you decide!

    Liked by 1 person

  2. Brooke says:

    I’d dip into your savings and combine that with your 3K this month to try and knock out one of your loans entirely. Even though it is super tempting, I think you 1) make huge progress and 2) get really reinvigorated when you jump so far ahead in your debt repayment journey at one time.

    If I were you, I would completely pay off Loan #2 (~11K) with that 6+% interest rate, and then take April off from debt repayment to build your savings up (ONLY once you are sure your husband’s job is secure.)

    Also, I am confused … The debt totals in your Feb 2016 recap only total 28,817.05 but your total in the post says that you owe 37,817.02 …. Even so, that 11K would pay off 30% of your remaining balance in one fell swoop (11K/37k=30%).

    Times like these can potentially transform your life … you knock out a payment entirely and you take months/years off your debt repayment timeline.

    Liked by 1 person

    • Hi, Brooke – Thanks for your comment!

      First, to clear up the total amount we owe: I went back and looked at that post, and from the images of the spreadsheet, I have $13,185.64, $11,273.98, $10,032.28, and $3,325.12 for the four loans, which is $37,817.02 – but I’m wondering if you have the first version of the post cached? I published it with incorrect info the first time, then edited it – but now I’m wondering if it didn’t update on anyone else’s and just updated mine? (I’ve double-checked that it was actually published, but this is weird.) We really do owe $37,000+.

      I definitely hear you on the momentum that can be built by paying down a good chunk. I did some math checking last night and did determine that we could pay off a good bit over $8,000 and I would still be comfortable with the amount of savings we have left (~$9,000, which was earmarked for house/car savings). If we paid off the maximum amount I’m comfortable sending, we would have Loans 1 & 2 paid off by November, which would be a huge thing! The only hiccup to paying off $8,000 today (actually, literally today, as the minimum payment goes through today!) is that we still don’t have H’s contract in hand, so I will probably not end up taking the chance of paying down more than $3,000 this month so that we hold on to our total amount of $15,000, just in case.

      Of course, then we will send that extra $5,000+ next month, but I get frustrated when I can’t do what I want when I want. I guess I’d be a lot more frustrated if something fell through, though, and we only had one salary moving forward!

      Navient makes it pretty challenging (at least, for us – maybe others have figured out a way) to pay just one loan instead of both. It requires sending in a paper check with a letter they ignore, then calling them to re-allocate the funds, etc., so I’m actually okay with big chunks of money being split to pay down both Loans 1 and 2 at the same time (the ones that are both at the 6.88% interest rate). The total amount of debt is what is most motivating to me, so as long as the largest interest rates are being attacked first, I’m good.

      Thank you for your advice and insights! You helped me refocus a bit – I appreciate it!

      Like

      • Brooke says:

        You are welcome! 8500/37L is no chump change! That’s still over 20$ of the balance that you can knock out over two months. How does this payment affect what minimum numbers you need to hit to meet that Feb 2017 goal now? Also, I like to reduce how much I commit to paying off in December due to the Christmas holidays in my month estimate so I give myself some wiggle room during the holidays!

        Like

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