Pay Down Debt or Build Up Savings? (1 Viewer)

[saintsfan342000]

I'm still very young and have no financial savvy, so my input might not be worth much, however comma:

I was listening to some financial talk show on KLBJ, 590 am, here in Austin just a few days ago, and someone phoned in with the nearly the same question as you (he was a college student who wanted to know if he should pay off college loans before he starts saving once he graduates and gets a job). They host said that if a person is in debt, clearing that debt should be their top priority, because saving when in debt is not really saving...it's actually just reducing your debt without paying off the debt. Make sense?

Hope I conveyed that well and that it helps.

 

[st dude]

It matters what the interest rate on the debt is. But if you are in the market for a mortgage, you should also remember that your debt-to-credit ratio considerably affects your FICO score.

You can put down 20% or more for a down payment ... if you aren't eligible for a favorable interest rate on the mortgage loan, you'll still have a higher monthly note than you should.

i am keeping debt tightly under control, but still dollar-cost-averaging to stay in this investment market while it is nice and low.

Probably solid advice but as a practical matter wont work for most people as they lack the discipline or mkt savy to pull it off.

Most people pay more interest on debt than they earn on savings. The best strategy is to pay off debt, keeping enuf cash for emergencies as some have said.

Thoes smart enough to find a low expense, no load mutual fund and who have the discipline to add to it either buy dollar cost averaging or investing more when the mkt drops will actually probably earn more on their money than they will pay if they have a low interest mortgage.

A good stock mutual fund will average about a ten percent return but the net is a bit less when your dividends and capital gains are taxed. I started putting money in the mkt again last week, as I always do after ten per cent or more mkt turn downs. If the mkt drops another ten percent I will invest a good bit more cash.

Since few investors understand dollar cost averaging, and since even then your investment might return less than what you pay on debt, I say paying down debt is better than building savings for most people.

Debt is ugly, excepy for building a business. If you are building a business, debt is the way to go(unless you have cash). A good business investment can return way more money on a cash investment than you pay in interest on the debt. Debt allows you to grow a business much faster.

 

[Dougd]

#1 Pay off credit cards.

After that, savings? What type of savings? What's the interest on your debt and what type of debt? Do you have 3 month's worth of savings?

 

[V Chip]

As most have said, paying off debt is generally the best options, assuming the debt is credit card/other "higher" interest rates. If your interest rates are anything above 12-15%, DEFINITELY go there first.

Saving is good as well but becomes a much better option if it is saving pre-tax dollars like 401K -- thus you could be saving $1000 pre-tax, or using that money post-tax to pay off ~$700 in debt (depending on income level and taxation).

 

[jlam]

As stated by many in the thread

Generally:

Pay off high interest debt first
Tax-deductible debt is fine to carry as long as you can handle it
Watch for such things as Student Loans which may actually disappear if you die and carry those longer
Saving is a must, so do both if you can as $ invested today is $$$ tomorrow

 

[DMaestro]

With the dollar being as weak as it is right now, I say pay down debt. Let the lenders have your worthless greenbacks. Later when the dollar makes a comeback, you get to keep more of your higher-value currency.....

 

[gaminerie]

Probably solid advice but as a practical matter wont work for most people as they lack the discipline or mkt savy to pull it off.

Most people pay more interest on debt than they earn on savings. The best strategy is to pay off debt, keeping enuf cash for emergencies as some have said.

Thoes smart enough to find a low expense, no load mutual fund and who have the discipline to add to it either buy dollar cost averaging or investing more when the mkt drops will actually probably earn more on their money than they will pay if they have a low interest mortgage.

A good stock mutual fund will average about a ten percent return but the net is a bit less when your dividends and capital gains are taxed. I started putting money in the mkt again last week, as I always do after ten per cent or more mkt turn downs. If the mkt drops another ten percent I will invest a good bit more cash.

Since few investors understand dollar cost averaging, and since even then your investment might return less than what you pay on debt, I say paying down debt is better than building savings for most people.

Debt is ugly, excepy for building a business. If you are building a business, debt is the way to go(unless you have cash). A good business investment can return way more money on a cash investment than you pay in interest on the debt. Debt allows you to grow a business much faster.

Oh, well, if we're not taking discipline into account, then i vote to use the money on racehorses, lottery tickets, and maybe a sack of magic beans.

Dollar-cost-averaging is no more complicated than planning to put aside a set amount of money each month and investing it. Finding no-load funds, especially these days with the internet, is hardly difficult (i hold eight of them, and that's precisely because i don't have a whole lot of time to diddle around on stocks-research).

If you do your savings-to-brokerage in a Roth IRA, then you don't even have to worry about the tax implications of the funds you choose.

But it's like anything else - you're not born knowing this stuff. That's true about consumer debt as well as investing. Take the time to run the numbers, as someone else suggested. And once the debt is paid down, keep it down and you'll be in great shape.

A large part of what gets the average person into trouble is that they are offered lines of credit without an accompanying explanation of how those lines of credit work for them - and against them. OR they are frightened away from investing because one or two people tell them it is too complicated.

 

[mr.t]

This may seem weird, but do a little of both. If we get extra cash, we put about 2/3 on debt and the rest in savings. The trick is to get into the habit of saving money every paycheck. I take so much out every month and cut back here and there where I need to. I have been doing it that way for years. Also, do not spend above your means. We can afford a bigger house, but we kept our old one and dropped our mortgage from 30 to 15 to 7 years over time. I do not keep up with the Joneses. I am a little cheap in some ways, but we have managed so far to put 2 all the way through private schools, and 1 almost done. If I need extra, I work extra; the same with my wife. We wanted to pay our car off early, so we both worked extra until we did. Debt is necessary, but too much is bad.

 

[TheDeparted]

I equate high interest CCs (with balances) to savings accounts. As mentioned above, paying $500 onto a 15% credit card saves you (15/12)% interest on $500 every month. Putting that same $500 into a 3% savings account only yields (3/12)% every month.

It's nice to have a cash backup, but if the emergency is dire enough, you will also have that $500 on the CC. While this is working against your goals, consider that you would have saved $37.50 in interest charges over 6 months, $30 better than the $7.50 the savings account would have yielded in the same time frame (using simple interest).

 

[Penguin]

As alluded to in an earlier post, a financial 'best practice' is to have 3 months worth of income in savings. If you are disciplined, you can get that goal accomplished fairly quickly. All of the suggestions are good ones. Personally, any debt that is tax deductable, we don't really focus on.

If you're disciplined with managing your debt/credit and you have a decent credit score, you can get a credit card that has a 4% (or lower) balance transfer offer. Transfer your highest interest debt to the card. Then, take the highest interest debt and pay as much as you can while paying the minimum on all other debt. We did this and it worked great for us, and I think paying off the smaller balances first would have been ok too. In 2 years time, we have 5 months of income in savings, a small balance on 2 low interest credit cards (it generally helps your credit store to carry a balance, especially when trying to get a mortgage), 3 other credit cards with a 0 balance, wife's school loan and we cut 8 years off our mortgage term by paying extra principle every month.

Bottom line - absorb all of the advice given in this thread and determine which suggestion (or combination of) will bring you the most success.

 

[TheDeparted]

I like to pay at least $1 more than the minimum on the cards I pay that amount...I'm not entirely sure it matters, but one card reports (to me) when I pay less than, equal to or greater than the minimum.

In this way I can at least technically say that I always pay more than the minimum