Do Better, Be Better Blog... June 11, 2009
I'm a 30 something professional that is new to the workforce. For the first time in my life I am able to save 10% of my income and still pay my bills. I do, however, have some debt. I have about $7000 in student loans and $3000 of credit card debt. I also own a home, but my mortgage payment is very manageable. I have heard that if you are in debt you should not save. Instead you should pay your debt and save later. I can handle all of my monthly payments, but I would like to know if I should stop saving and send in extra payments to decrease interest accrued over time and settle my debt. - Save up or settle up in DC
Dear Save or Settle Up:
Ask yourself this: If I lose my job tomorrow – or next year – how will I manage until my next opportunity? If saving 10% of your income gives you enough cushion to live comfortably for a few months then your plan works – if not you need an emergency fund before you eradicate your debt. This account should have six to eight months of living expenses, so for example if you bring home $3,000 per month and spend it all you need at least $18,000 saved. This is especially important due to the uncertainty of today’s job market. In your case it makes little sense to have zero debt but inadequate savings because you’ll end up using credit for emergencies. For many creating an emergency fund seems about as realistic as levitating, but so was having a president named Barack Obama back in 2007. All things are possible. Create a feasible monthly savings plan, have a little faith, a lot of discipline and you’ll be there before you know. If you have the uncontrollable urge to put extra payments on your debt then double up on your credit card payments because that interest rate is likely higher than your student loans. If getting out of debt is really important to you then here’s a fair compromise: save three months of your emergency fund, then focus on your debt, then work on saving the rest of your fund. That way all bases are covered.
---Tia
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