topic Re: Increase savings or pay down debt? in Personal Finance

Increase savings or pay down debt?

Anonymous — Fri, 23 Jan 2015 16:31:42 GMT

Hi All, longtime lurker and obviously 1st post, but I am looking for some guidance.

Do I work on building up my savings/emergency fund or pay down debt? Starting in February I will have an additional $200-300 a month that I can either put in savings or pay down debt. I go back and forth and can’t seem to stick to one decision. What would you do?

Savings: $1682

Debts: see below

401K Loan: 10,158.58 3.5% 5 years 9/21/2014 92.92 Bi-Weekly
Car Loans: 1). 6871.35 2.49% 60 Months 12/14 (1st payment) 156.90 (monthly)

2). 9953.81 2.49% 60 Months 12/14 (1st payment) 182.47 (monthly)

*refinanced both vehicles with PSECU 12/14

Credit Cards:

1.) PSECU (20,000) – 5301.61 2.9% until 12/15 ( Completed balance transfer 11/14).

*Minimum payment is 2% of outstanding balance.

*PSECU = PSL/Visa Combo

2.) Barclay’s Arrival (2500) - 1424.03 0% until 6/16 18.99% after. (been paying $50 a month. Min is $20).

I have multiple other cards that all report a zero balance. If I use them I PIF. Total available credit is: 82,100. This amount does not include the “perceived’ additional 20,000 from the PSL side of the PSECU combo. I also have student loans which at this time my payment is $118 a month with a term of forever. I’m not ready to tackle that giant yet. No mortgage. We rent. No prior BK’s. No current derogs. No collections. Scores across all 3 are 700-725.

I was contemplating BT’g the 401K loan to the PSECU visa (2.9% until 12/16), but I don’t want to spook any of my creditors out by now having a 15,000 plus balance reporting. I’ve been banking with PSECU for years. They are my primary bank, but the PSECU 20/20 combo is new for me. I originally had a limit of $6500 on the visa alone. As of December, I now have the combo. Doing the BT would free up more money in my bi-weekly pay and I could also contribute more to the 401K. At this time, I’m only contributing 1% every two weeks. I’ve also thought about paying down one of the cars a little more quickly. Car 1 is the car my husband uses for work. He has a 3 hour commute with no plans to change jobs as he can retire in less than seven years! It is a 2008 Yaris with at least 160,000 miles on it now, if not more. I’m not sure how much longer we have with this car before we have to get a new one. My husband’s credit is not so good right now and would not be able to get an auto loan and if he would it would be at an exorbitant interest rate and high monthly payment. Help! Lol, what do I do with this extra 200-300$ a month?

Thanks for your input ----- RG

Re: Increase savings or pay down debt?

Revelate — Fri, 23 Jan 2015 19:27:36 GMT

Welcome to the forums!

I think you're in pretty good shape right now and working on emergency fund is likely where you should be. It's a different equation if your APR's were at 20% but at 2-3%, eh shore up the emergency fund then start getting rid of the debt.

Can you BT the 401K loan? If it were me I'd do this anyway, getting my money back into my retirement account faster and not losing time on the investment, utterly winning in my opinion. I don't know that it works that way though with the PSECU tradline, may wind up with a penalty interest rate I'd look carefully into it. Doubt you'd spook too many lenders, I'd take a step backwards personally if I had to via adverse action to airstrike my 401k loan as that strikes me as a good use of credit (finances > credit score) if you can pull it off without an unreasonable APR. I don't know what the breakpoint is though, likely I'd put it at 10% or lower on the PSECU APR to make it worth while but it gets more complex when talking investment return (I used 6%) and the tax advantaged nature of it.

Re: Increase savings or pay down debt?

Anonymous — Fri, 23 Jan 2015 19:59:38 GMT

RG2015, welcome to the forums.

Have the both of you considered sitting down with a financial advisor by chance?

Re: Increase savings or pay down debt?

Anonymous — Fri, 23 Jan 2015 20:27:49 GMT

Thank you both for your replys and the welcomes!

@ Missing, I actually have contemplated using a service promoted by PSECU called "Balance Financial Fitness", which offers those services. I'm tying my emotions to my finances. I've been without savings and living paycheck to paycheck and well, it sucked! This is why I've been wracking my brain as to how to do things properly so I can manage the extra income appropriately and be beneficial financially. Bottom line, I want to make smarter financial decisions. I don't want to have to be in that position again. There's a lot of back and forth between those who say save and those who say pay down debt. I want to do both, lol! My husband and I keep all of our finances separate. We were both married before and both had joint accounts ect with ex-spouses and for now choose to keep things separate. I'm not sure I need to elaborate any further on that issue. I've tried to broach the subject with my husband, but he is very sensitve and embaressed by his credit or lack thereof. He is in need of some major repair, but is being stubborn, so I am just trying to keep my credit profile in check and our savings robust if possible. I

@ Rev, I was thinking of keeping my focus on savings. I might just follow through with the above (the PSECU service) and see where that takes me. I'm good to go with doing the transfer, according to PSECU customer service, but again is that the right route? :-/

Re: Increase savings or pay down debt?

Anonymous — Fri, 23 Jan 2015 20:46:27 GMT

RG2015, thanks for replying. The reason I asked about a FA is due to your 401k loan. Those should really only be touched in worst case scenarios, and I fully understand many siutations in life fit that criteria. 5 years on car loan normally is bad but you got a great interest rate so that negates the long-term payments for a car.

Have you guys sat down and made a true list of "needs" versus "wants"? I am asking that not in judgment but because when I finally did it to myself I was really shocked at how short the "true needs" list was. I really feel that a session with a FA would be really beneficial, even if you don't decide to pursue it after one session you will come away with ideas. If you do it have everything documented and ready to maximize the time.

SME's (Subject Matter Experts) are resources we can all benefit from because we can't be SME's in everything.

Re: Increase savings or pay down debt?

Anonymous — Fri, 23 Jan 2015 21:28:33 GMT

@ Missing,

Yes, we have which is where we've come up with the extra 200-300 a month. We've done things recently such as cut our cable (the kids watch movies), switched electricity companies, buy non-name brand groceries/toiletries, couponing, downgraded our phone plans ect. I was also just given a raise, so between these little seemingly insignificant changes and my my raise we've come up with an extra 200-300 a month. This we did on our own. I'm actually quite proud of us. It's what to do with it and where to put it that becomes the struggle. The 401K was, at least in my eyes, and emergency loan. Custody battle...no it was a war. My daughter was worth every penny of the loan. I had no credit cards at the time that could cover the attorney and court fees without spreading it accross multiple credit cards at interest rates 16% and higher. I didn't have the 20k limit with PSECU at the time. The 401K was quick, available and I could pay off everyone from one pot of money. Now it's trying to figure out where to allocate the extra money. I think I could get my husband to go by himself to see a FA, but not with me present. It's ridiculous, I know and frustrating. I can get him to see a small portion of a bigger picture (e.g. we can save immediately by doing A (cutting out non-necessities = instant cash), but for the longterm B (i.e. buy a new car with a decent interest rate and payment) he wants no parts of it. His repsonse is I'll buy a beater car and pay cash for it. lol, totally frustrating. Thats great and all, but a beater car will never survive his commute. For now, we have no interest in buying a house because we love the development we are currently living and townhouse we live in, but what happens if we suddenly decide that home ownership is something we would like to pursue? It's the bigger picture with him that I personally struggle in getting him to understand.

Re: Increase savings or pay down debt?

Revelate — Fri, 23 Jan 2015 21:53:16 GMT

Big picture? Get your money working for you rather than against you: reduction of interest rate AND getting all that money back into your retirement accounts as soon as possible by airstriking that 401k loan... I would be doing it right now if I were in that situation personally. Just triple-check any fees involved.

Re: Increase savings or pay down debt?

Anonymous — Fri, 23 Jan 2015 21:53:57 GMT

I hate having debt so my first instinct would be pay something down hard. BUT your rates are excellent. Therefore i would have to ask 1 simple question. If you decide to save, can you commit to saving? Saying you are going to save that 2 to 300 bucks is great, but will you do it? If you can honestly answer yes, then personally I would do that. When you get to the point where those bal transfers run out you will have to make decision on whether to use the savings to pay it down or not, but that gives you a significant amount of time to get into the habit of saving, which is a valuable weapon to have in your arsenal.

Plus you have a car with 160xxx miles on it. That savings could go to a down payment if needed, cover repairs, etc. Getting in the habit of saving has done wonders for me. I used to be paycheck to paycheck. Now i track everything and in 2 years Ive saved almost 18 grand with an income of less than 30k. My only regret is the 10 years that I have nothing to show for

Since you already are a CU member, if you plan on saving, do it in a seperate account. I find its much easier when you dont see the money just laying around. Set goals, and celebrate the successes. It may seem minor when in a few months theres 1k bucks in that account, but it seems a heck of a lot more major when in 3 years theres 15 grand sitting there.

Re: Increase savings or pay down debt?

Anonymous — Fri, 23 Jan 2015 22:13:42 GMT

Thank you all. This is why I came to these boards. Again, long-time lurker. So here's my tentative plan of action 1). complete the BT to pay off the 401K, 2). increase 401K contributions. 3). save.

I still may call the financial fitness program promoted by PSECU for another perspective. It's a nice site and they actually have all the forms that need to be completed before the actual appointment. Yes, I can and have committed to saving :-) That's how the $1600 got into savings. I refuse to touch it, and it's already in a separate account. It's comforting knowing it's there even if it is a minimal amount. Something is more than nothing though.

Thanks again to you all for taking time to respond! You all have been very helpful!

Re: Increase savings or pay down debt?

Anonymous — Fri, 23 Jan 2015 22:39:49 GMT

Definitely agree with adding to the 401k. Especially if there is more company match. Those funds come out of you check pretax, so adding even 50 bucks a month may only change your take home by 35 or 40 dollars. And if the company is matching you are getting 75 to 100 for a pay reduction of 30 to 50. That is what is known as a no brainer.

Re: Increase savings or pay down debt?

Anonymous — Fri, 23 Jan 2015 22:47:45 GMT

@pfarro1 Yes, it is a no brainer, lol. I think I just needed encouragement to know that I was making the right decision. My employer does match, but I don't know the precertage off the top of my head.

Re: Increase savings or pay down debt?

Anonymous — Fri, 23 Jan 2015 22:56:25 GMT

Thanks for this thread. Usually when you read something like this its an automatic, PAY THE DEBT DOWN. Your situation with low rates has been interesting. I actually got out calculator and paper and pen to play with some numbers. Which is always good, cuz it makes me think of what I can do better or differently. Plus the fact that you arent really up to your ears in it and just balancing on a knife edge shows how making changes before they become serious problems can help. Best of luck in whatever plan you execute.

Re: Increase savings or pay down debt?

Anonymous — Sat, 24 Jan 2015 00:01:04 GMT

@pfarro1 You are welcome! It took a lot of courage to write this post, but I just felt desperate. Myfico is a wealth of info with a lot of knowledgeable people who frequent it, so I figured why not. Thank you again!

Re: Increase savings or pay down debt?

Anonymous — Sun, 25 Jan 2015 05:34:50 GMT

My 2 cents:

All other things being equal, pay down debt. You can think of paying down debt as an investment that has a guaranteed rate of return equal to your interest rate. If you are paying 4% interest, paying down debt is equivalent to a tax-free guaranteed bond that pays 4%. I call it tax free because you don't get taxed on not having had to pay interest..(If you are writing off the interest as an expense that might change the math.) Such a good deal is unheard of, the only way to get such a fantastic investment product is to pay down debt

Sometimes though all other things are not equal. If your company is offering to match your investment then the rate on return on THAT is huge. Say they put down $1 for every $2 you invest. Right out of the gate that is a 50% return on the money you put down, which clearly beats even the fantastic return you get paying down debt.

So, if there is free money on the table through some matching contribution, take the free money. Then pay down debt with what you have left.

Re: Increase savings or pay down debt?

Anonymous — Sun, 25 Jan 2015 05:39:36 GMT

As for what debt to pay down -- even though it may not look like it has the highest interest rate, I'd pay down the credit card debt first. You may get away with a balance transfer that keeps the interest rate low when your current deal expires, but that's not a sure thing, and then you could see the interest rate on that skyrocket.

Some people carry debt on credit cards at 0% or very low rates for a couple of years, they stay ahead of the game by kiting the balanace from one card to another as their low interest periods expire. However, the credit card companies know all about that and at some point if they become uncomfortable about the individuals finances the 0% balance transfer offer won't be available and the debt will go to some ludicrously high interest rate.

The other loans are backed up by assets and so you'll get a lower rate on them. I'd still pay those off before adding to savings, UNLESS you get the matching deal.

Re: Increase savings or pay down debt?

Anonymous — Mon, 26 Jan 2015 10:25:22 GMT

Increase to have an emergency fund in liquid cash but after that the next animal is becoming debt free. You make make interest in savings but will pay much more out on debt.

Re: Increase savings or pay down debt?

Anonymous — Fri, 30 Jan 2015 18:48:57 GMT

@Anonymous wrote:
Hi All, longtime lurker and obviously 1st post, but I am looking for some guidance.
Do I work on building up my savings/emergency fund or pay down debt? Starting in February I will have an additional $200-300 a month that I can either put in savings or pay down debt. I go back and forth and can’t seem to stick to one decision. What would you do?

Savings: $1682

Debts: see below

401K Loan: 10,158.58 3.5% 5 years 9/21/2014 92.92 Bi-Weekly
Car Loans: 1). 6871.35    2.49% 60 Months 12/14 (1st payment) 156.90 (monthly)
                                 2). 9953.81    2.49% 60 Months 12/14 (1st payment) 182.47 (monthly)
                              *refinanced both vehicles with PSECU 12/14
Credit Cards:
                    1.) PSECU (20,000) – 5301.61 2.9% until 12/15 ( Completed balance transfer 11/14).
*Minimum payment is 2% of outstanding balance.
*PSECU = PSL/Visa Combo

2.) Barclay’s Arrival (2500) - 1424.03   0% until 6/16    18.99% after. (been paying $50 a month. Min is $20).

I have multiple other cards that all report a zero balance. If I use them I PIF. Total available credit is: 82,100. This amount does not include the “perceived’ additional 20,000 from the PSL side of the PSECU combo. I also have student loans which at this time my payment is $118 a month with a term of forever. I’m not ready to tackle that giant yet. No mortgage. We rent. No prior BK’s. No current derogs. No collections. Scores across all 3 are 700-725.

I was contemplating BT’g the 401K loan to the PSECU visa (2.9% until 12/16), but I don’t want to spook any of my creditors out by now having a 15,000 plus balance reporting. I’ve been banking with PSECU for years. They are my primary bank, but the PSECU 20/20 combo is new for me. I originally had a limit of $6500 on the visa alone. As of December, I now have the combo. Doing the BT would free up more money in my bi-weekly pay and I could also contribute more to the 401K. At this time, I’m only contributing 1% every two weeks. I’ve also thought about paying down one of the cars a little more quickly. Car 1 is the car my husband uses for work. He has a 3 hour commute with no plans to change jobs as he can retire in less than seven years! It is a 2008 Yaris with at least 160,000 miles on it now, if not more. I’m not sure how much longer we have with this car before we have to get a new one. My husband’s credit is not so good right now and would not be able to get an auto loan and if he would it would be at an exorbitant interest rate and high monthly payment. Help! Lol, what do I do with this extra 200-300$ a month?
Thanks for your input ----- RG

Forget everything else, denfinitely pay off your CC debt first before your offer expires.