Paying off debt from sinking funds?

(This is copied from my journal, because I thought more people may see it here, and I would like a variety of opinions.)

HELP.  

So I just listened to the “Real Priorities” whiteboard Wednesday from a week ago, and it got me thinking. One of my real priorities is to pay down my debt and free up that cash for other things.  

Right now, I have some “true expense” categories in my budget that don’t have any immediate requirement: my Cats category is intended as a stockpile against any vet emergencies, and my Medical category is intended for, well, medical expenses. Between those two categories and my 2 months funded Christmas category, I would have enough to kill one of my major debts: either the credit card or the personal loan.  

I know it kind of goes against everything YNAB recommends, to raid those true expense categories to pay off debt, but depending on which debt I paid off (and right now I’m leaning towards my personal loan), I would be freeing up that $100 in my budget to both rebuild those categories AND put towards the other debt.  

I have about the same amount of funds in my Vacation category as I do in my Medical category, too, so if I were feeling really squeamish about pulling from that for emergency reasons I could pull from vacation instead.  

Am I being short-sighted? Cause I would really truly love to be finished with at least one of these debts, sooner rather than later. 

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  • Sorry @prittyspeshul, I don't believe you are going to get many responses.  This is a very personal choice.  Normally, I would vote against taking out of sinking funds but only you know how much you have, how likely the various events are to happen, what you have in back up if they do.  There are many different things to take into consideration.  Don't cut yourself too short, and pay off debt as quickly as possible.  It can be difficult to determine where to draw the line.  I would recommend, if in doubt, think about it some more, and build up a larger emergency fund, but that's just what I do.  

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  • Knocking out a debt and freeing up cash flow would be tempting. Personally, I would pull from Vacation before medical, if I were going to do that at all. I would want to figure out how long it would take to refill the emergency categories with that 100 (beyond normal funding). It's probably about as long as it would take to just pay off the debt. While you may not need those categories now, can you say the same for however many months it will take to rebuild the funds? If it's not actually a priority to refill those categories faster than the normal allocation, then this could work, as the 100 would actually be freed up.

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  • I am a YNAB noobie, and what I recommend is just my opinion. But to me, you have to look at interest rates. How much money are you making in interest on your sinking funds vs how much are you paying in interest on your debts? I would be willing to bet the debt interest costs are pretty high. I got myself out of credit card debt by paying off the highest interest rate cards (or debts) first. Mathematically, if you do this, you get the best return on your money. For me there was a lot of temptation to pay off the smaller debts first, to score that emotional win. But my interest rate on those debts was under 3%. My American Express card was charging me like 18% on the buy over time balance.  It didn't make financial sense to go after the smaller payment, low interest cards just because the balance was smaller.  If you have some debts at a higher interest rate but with a longer payoff period, you could alternatively pay them off in rank order of the size of the monthly payment, to free up the most cash. I am a big fan of keeping some cash in reserve, but I wouldn't keep a vacation fund with debt sitting out there. My priority would be to get out of debt before taking a vacation. Your priorities may vary, and your budget should reflect your priorities.  Best of luck.

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  • DO NOT TOUCH medical. Christmas, that's your call since it's 10 months away and discretionary. When people really get it and use YNAB optimally to change their financial picture, they learn to let money sit. For many, pre-YNAB financial life has a lot of drama. YNAB makes things boring. You put money into a medical category because eventually you will need it there. Then you just let it sit there, being bored. It seems exciting to move the money and pay off the debt. But in lots of cases, that's just replaying the financial drama that works against long term financial health. Stick to the plan. Let it be boring. You'll get there. 

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  • I agree with all on here.  It really does depend on your priorities. Personally, I would work toward paying the highest interest rate debt off first, making minimum payments on all the others. Unless all the interest rates are pretty close to each other, say within a few percent.  If so, then I would work toward paying the smallest debt off first and minimum payments to the rest. 

    If I had extra funds in areas that could be used toward paying off debt, i would do so. Not from medical though.  I would use the vacation funds and change my Christmas budget to less to pay off debt as that would be my higher priority in my life than taking a vacation or splurging on Christmas for everyone. 

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  • I actually have the opposite opinion to lebdavidson2 . Unless you and your pets are in poor health, I would absolutely get rid of both of these and pay off your credit card. Why? Because medical and vet emergencies can usually be financed at 0%. Right now, you are financing the possibility of a medical emergency at whatever high APR your card is charging you. If you use the money to pay off the card, you will also create liquidity. Debt liquidity, but liquidity.  In a truly dire emergency, you could finance something on your credit card again, but in the meantime you’ve dug out of that hole. 

    I wouldn’t choose the personal loan because you can’t turn around and spend more on it if needed. 

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  • I would pay off the debt now and work to replenish Vet, Medical, and Christmas. The latter you obviously won't need for a while, and the other two you can always put on the card IF THEY ACTUALLY HAPPEN and you're not prepared by then.

    Look at it from the other direction, assuming you don't have those categories or the debt: would you take out a loan at your highest APR just to have that cash in those categories?

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    • nolesrule
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    What type of debt is it and what's the interest rate? To me the "liquidity" of the debt and the interest rate make a big difference. For example, I wouldn't pay off a car loan with emergency funds if in an emergency I had to put it on a very high interest rate credit card. But if it's high interest credit card debt, then the worst case scenario would have you putting the emergency back on the credit card, and you will do no worse than break even less the period of time with the reduced debt (which would be a win).

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  • WordTenor and dakinemaui have me convinced. I think your journal said that debt was at 13%ish? That's high. I stand by the general principle of boring finances. Letting money sit is a crucial skill. Pay off the credit cards and then work on building up (and not touching) those funds. 

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  • prittyspeshul said:
    I have about the same amount of funds in my Vacation category as I do in my Medical category, too, so if I were feeling really squeamish about pulling from that for emergency reasons I could pull from vacation instead.  

     The math and finance aspects have already been discussed pretty well.  How about behavioral economics?

    If I gave you $100 with no obligation to budget as you choose, what would you do with it?  Would Vacation be a higher priority for new money than loan payoff?  It is, for some people; but I'm so security oriented that I'd cancel a planned vacation in order to retire debt from an emergency.

    If you think the way I do, you wipe out one of those debts from the Vacation category, and just don't go on vacation until enough money is allocated to the Vacation category.  My father would say that as long as you have debt, everything you spend is borrowed money. 

    OTOH, if going on vacation is a higher priority for you than getting rid of the debt, let the debt ride.  It's a budgeting decision.  One of the more valuable things about YNAB is the decisions to move money from Vacation to debt payment, or from emergency fund to debt payment, highlight where your real priorities are.  Once you start making decisions like that, you might find that your real priorities aren't quite the same as you thought they were when you were budgeting the first time.

    Thought questions:  Is going on vacation more important to you than retiring debt?  Are you comfortable with the plan of eliminating a medical emergency fund to pay off a credit card, then putting the CC debt back if you get unlucky and have a medical emergency before the medical category is built back up?  Different people will arrive at different conclusions, but there is value in thinking these things through.

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  • I really appreciate all the advice and thoughts here, guys. 

    To clarify a little: 

    The personal loan and credit card both have a balance of around $750. 

    The personal loan is a 24 month term, started in 2017, so it will be ending around October or November of this year. 

    The personal loan is at an interest rate of 16.99% (my credit was very Not Good when I applied for it) and the credit card is at 12.99%. 

    The vacation is already planned and paid for (flights and tickets purchased). A friend generously offered to pay for our accommodations and my husband is shouldering the bulk of the other costs.  

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      • monkeyhanger
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      prittyspeshul Are there any penalties for paying the loan early?

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      • nolesrule
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      prittyspeshul Chances are if you had to go back into debt, anything you put on a credit card will be at a higher rate than either of those. But if you are going to pay one of them off now, make it the personal loan since it's the higher rate, as long as there's no prepayment penalty.

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      • prittyspeshul
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      • prittyspeshul
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      nolesrule monkeyhanger There are no prepayment penalties. I work the financial institution the loan is taken from so I’m intimately familiar with the way the loans work, haha. 

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  • Oh! Another thing I'm considering, after reading all the responses, is that the debt on my credit card is cash advance debt, because it was from a balance transfer. 

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  • As I said earlier, I really appreciate everyone’s input. I think I have ultimately decided that for now, I am going to leave the “debt prevention” funds alone. However, that I had this conversation seems to make it clear that I need to refocus my priorities because paying down debt is more important than I may have been treating it. 

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