Hellobee Boards

I like Dave Ramsey's method, where first you put aside $1000 for emergencies and then you focus on paying down debt. I think the type of debt also should be taken into consideration though, if you have high interest/consumer debt I would really focus on paying that off before saving any additional money, but if all you have is mortgage/student loan debt I wouldn't worry as much about paying it down aggressively.

I would follow Dave Ramsey's plan.

Save 1,000 emergency fund
Pay off debt, smallest balance FIRST then taking that minimum payment and adding it to the next smallest balance
Save enough for 3-6 months living

And I don't remember the rest of the steps off the top of my head. I think Mrs. Sunglasses did a blog post on it though!

ETA: I think he's really big on not skipping or combining steps but personally I don't think there's anything wrong with adding to 1,000 savings to get to your 3-6 months at the same time as paying the debt if you can.... probably would take a little longer but if you could swing it would be effective.

What kind of debt is it? If it's school/car/low interest loans, I'd put some in savings and pay the debt off slowly. If it's high interest debt like a CC, I'd shovel everything into that to pay it off. The way I see if, say you're paying off the CC and putting some into savings. Something happens, you have savings to pay for it. But all that while the money is in the savings, the CC balance is accruing a ton of interest. So if you just put everything toward the CC and something happens, yes you may have to put stuff back on the CC, but you're no worse off at the end of the day than if you had savings to use. And in that time, you've put more cash into the CC and lowered the interest they'd charge you.

As a financial analyst, I like to emphasize interest rates in the decision. You should have an emergency fund first, think of that as money you can't touch so it doesn't "count" in the rest of the analysis. Decide what you are comfortable with for your emergency (I agree with 3-6 months expenses). Then ignore that, because you can't touch it.

Any money above and beyond your emergency money, make your decisions based on interest rates. The "cash" you have sitting in a checking/savings account should be earning some kind of return, either the obvious return of the interest rate your checking account earns (probably very small) or potential return from other investments (if you moved the "cash" to a Roth IRA or by buying a investment property, for example). If the "return interest rate" that you are earning on your cash is LESS than what you are currently paying on debt, you should without a doubt pay off your debt. You are paying more money to hold the debt than you are "earning" by holding the cash. So, instead of your cash helping you it is hurting you because you are essentially paying interest on it while sitting in your bank account because you're paying to hold the debt.

On the flip side, if your "return" rate is higher than your debt interest rate (you are earning more interest by putting money into a 529 for your kids college than you owe for your low low interest rate on your mortgage), then you should continue putting your cash into something that is earning more money that it is costing you to pay interest on your mortgage.

Hope this helps!

We do both at the same time, with a greater emphasis on savings because I'm pregnant. We put a set amount towards our savings accounts (we have 3) every month, and put a lesser amount on our credit cards. We have one car almost paid off, and the other we just make regular payments on. I'm hoping in the next couple of years to be completely CC-debt free, which will free up that money to go towards our 401Ks.

How I paid off my debt (naughty use of cc/loans/etc. when I was younger haha)

Put 1-2k in savings.

Pay off smallest balance first while making minimum payments on everything else, and then “snowball” that payment towards the next smallest debt once you have the first paid off. Repeat until your debts are paid off.

I know it makes sense to tackle the debt with the highest interest rate first, but I needed the “bump” of seeing myself actually pay off a debt. If I had one debt that was at a way higher interest rate than the others, I would start with that one instead.

@berdine:

Where would you put the can't touch emergency fund? We have it in an investment account, so if we needed to use it we would take a hit on capital gains taxes.

@Bao: I think the point of the savings it's to build money, since Dave Ramsey's next steps include investing and such, but moreso IF something were to happen (needing new tires, etc) you wouldn't have to rely on your CC to pay for them. Ultimately you want enough savings to cover living if you couldn't work, again not so that your savings is making you money, but to cover unexpected need.

ETA: For us following Dave Ramsey's plan is easy to not question b/c he's already lost millions being in debt and then built it back up. Figure if he did it, his way must have some merit. lol

we have been doing the cc rollover thing because we have several. we started with the smallest amount, and did minimums on the rest til it was paid off. then went to the next smallest, etc. but, we also went in order of interest. the first one we paid had a lesser balance but higher interest.

in the meantime, we haven't put extra into savings but also haven't touched it over the past year til this month because of car repairs.

when we get the tax refund, we'll put bulk into savings, pay off 2 cards (leaving us with 2) and have a little bit of fun money. we've been so strict that we need to do something fun! lol.

@Bao: If I were in your position, I would look to have 1 to 2 thousand in an emergency fund and then pay off the credit card and personal loan. After those were paid I would work on increasing emergency fund to a level that I was more comfortable with and then start paying down the rest of the debt. based on everything yo have told us, i would get rid of the cc debt asap.

Since you said you're buying a house as well, I would definitely have something in savings just in case something does go!

@Bao: 8 months isn't realistic for me either, especially with planning for a baby.

@berdine: thanks for the response, our emergency investment acct is separate from our retirement savings- our 401Ks, my IRA.

Oh and another Dave Ramsey point to throw in since this is a baby blog - he says to halt your debt snowball (minimums only) when pregnant and save as much cash as possible. Once mom and baby are home and fine, take that money and make a big payment on the debt (but have the cash in case there are any pregnancy complications).

@Bao: Do you have a good monthly budget. Really the first step in DR is to set up a good budget. Things like car repair, doctor issues, etc should be budgeted out ahead of time. The $1,000 should just be the truly surprise things. I agree though, with owning a home, two cars, and having a LO, $1,000 doesn't seem like a lot.