To Save or not to Save

Should a person save money while they are in debt, or should they utilize all their free cash to pay down the debt? I have seen this question addressed multiple times on the net. Here and here, specifically. It seems to be a heavily debated topic.

From a strictly economic standpoint, one would be better off to save cash if and only if the interest rate on their savings was greater than the interest rate on their debt. For people with credit card debt, I can hardly imagine a scenario where this would be the case. In my personal situation the credit card debt is raking in nearly 11% while my savings account is paying me a little over 1%.

If you find yourself in this dilemma, the only advice I can offer is to do what feels right. If you decide to save up some emergency cash instead of paying off your debt be aware that it comes with a price; you will have to pay additional interest on your debt. With this in mind, it is possible that the benefit that is derived from the security of having an emergency fund set up will outweigh the additional interest you end up paying for delaying a full frontal attack on that debt.

This is how my family and I have tackled this subject: beginning four months ago we started paying a fixed $600 per month to our credit cards (remember that we are in forbearance on my wife's student loans and mine are still within the grace period, so we aren't making payments on them at this time), while at the same time saving roughly $200 a month in an online savings account. Now that we have a pretty good cash cushion, we are going to utilize that $200 that we had been saving to pay towards our debt. Using Microsoft Excel to do a quick and dirty amortization schedule, it looks like, at this pace, we will be rid of our credit card debt in 20 months instead of 27! Also, I think we might look into one of those Zero percent balance transfer offers that are floating around the web to help expedite our goal (more on this later).

Mountains of Debt

This is pretty discouraging, but I know that we can do it.



We can pay off this debt!

Fortunately all of my student loans are still within the grace period, and my wife's loans are currently in forbearance. Once the grace period on my student loans expire in July or August I will apply for forbearance on those, too. If you are not familiar with forbearance it is a good option for people that are struggling to make the payments on their student loan obligations. Essentially you contact your loan issuer and request forbearance, if granted you have a year before you need to start making payments. The catch is that during that year any interest that would have accrued is added to your loan balance at the end of the forbearance period unless you pay the interest during the year. This means that you will owe more at the end of the year than you do right now. This situation is good for us though, since it will allow us to focus our efforts on paying off our credit card sooner, which has a MUCH higher interest rate than our student loans. All of our loans are serviced by two companies: UHEAA and Fedloan Servicing.

For more information on forbearance with UHEAA click here (scroll down to the middle of the page.)

For more information on forbearance with Fedloan Servicing click here.

Origins

I remember the first time I couldn't pay my credit card balance in full for the month. This was back in the Fall of 2000. I had charged over eight hundred dollars that month, mostly on restaurant food and various forms of entertainment. I had nothing to show for my purchases. I remember thinking, "It's ok, I will just pay it off next month."

Well, it has been nearly 120 months and I am further in debt by a few orders of magnitude! Needless to say this happened by my own stupidity and in my defense the majority of my debt is now of the so-called "good" debt-student loans.

On top of my earlier stupidity, my family and I have lived off of credit cards and student loans for the past four years while I went to school. While not working during college enabled me to focus my efforts on my academic pursuits (I earned high marks during college) it left us with a skyscraper of debt that we must now deal with.

The good news is that since the beginning of the year we have not used our credit card. We are committed to living within our means now. We have started a budget and are following it. We are slowly paying down our debt and are saving and investing.

In future posts I want to share our budget system and start to track our net worth to help motivate us in our efforts. I also want to start to discuss saving and investing. Good luck to those of you in similar situations. Through education, patience, and persistence we can all get out of debt and become financially secure.