SURVEY PLEASE: Build savings or payoff debt in 2020?

Hi, I'm usually on a new fast, however, in light of today's global crises ......

 QUESTION:  would you SAVE all that you can in 2020,  -OR- would you pay off your last debt of $9,000.00 and then save money?

I'm curious to what others are thinking/doing during these present world issues.  I'd like to pay off last $9K in four months to be 100% debt free; however, I wonder if it is more pressing at this present time to sock in more savings.

Thanks you so much for your time and input to my dilemma.

Ellen Waters

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  • Both. I think the Dave Ramsey approach is pretty good. Save a $1000 emergency fund and then aggressively pay off debt.  If you have to dig into the EF, fill it back up and then continue to pay off consumer debt. 

    Like 1
      • Ellen Waters
      • Making progress on my desired goals!
      • ellen_waters
      • 9 mths ago
      • Reported - view

      Superbone Thanks for your input, Superbone.  I have my $1K emergency fund.  I just can't decide if I should add to the savings account in lieu of present issues, or go ahead and pay off my last debt and then sock more into savings.  I like your dual approach.

      Like
  • I don't get it. What global issues?  All I see is a booming bull market and trade deals left and right brightening my every morning 🤑 🤑 🤑.

    Like 2
    • Annieland do you get it now?

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      • Annieland
      • YNABbing every day since 2009!
      • Annieland
      • 6 mths ago
      • Reported - view

      Ivory Storm I think I humbly answered that below.

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  • Hi Ellen !

    Is there an amount you can think of that would make you feel comfortable with your savings? I know you mentioned having a $1k emergency fund, if that was $5k would your mind be at ease? If so, could you save up that $5k, then pay off your debt, then go back to savings? 

    I didn't have a lot of consumer debt (just student loans and mortgage), so I chose to put savings aside first. Now that I have a comfortable (to me) cushion to fall back on, I'm tackling my student loans in full force.

    Like 2
    • Khaki Storm
    • YNAB book topics online: https://support.youneedabudget.com/r/q5w48j
    • Khaki_Storm.1
    • 9 mths ago
    • 1
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    Totally agree with having cash on hand as described already. If you're serious about be ready for almost anything, then I'd suggest you read https://www.amazon.com/S-L-T-Plan-Economic-Proportions-ebook/dp/B0077A2AL8 If it sounds interesting to you, I can give you a short summary. Some steps are easy, others are not and require international travel to complete.

    Like 1
      • Ellen Waters
      • Making progress on my desired goals!
      • ellen_waters
      • 9 mths ago
      • Reported - view

      Khaki Storm You got my number, that is where I am now.  Bentley's book looks interesting.  If you are still willing I would love a short summary.  Thank you.

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      • Khaki Storm
      • YNAB book topics online: https://support.youneedabudget.com/r/q5w48j
      • Khaki_Storm.1
      • 8 mths ago
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      Ellen Waters First, this isn't an easy plan. I'm still working on it a little piece at a time. It is written from a Christian point of view and looks at several situations from the Bible that could come again like famine, war, crazy inflation, mob/riots. It also works with the assumption that complete chaos will not last. Even in the worst situations, some sort of order will arise. S = save 20% of your income every year for 7 years. Yep, that's a lot. In YNAB, I'd view that as being budgeted 17 months ahead. If you have debt, he says to split your efforts 50/50 to paying down the debt and building up savings. A = asset allocation includes your savings, investments, and income. He doesn't give investment advice, but just describes the concept of diversification and says to seek a professional for investments. On income diversification could be growing a garden in whatever space you have and selling produce at a market, raising chickens to sell eggs, hunting/fishing, learning to can, etc. These are income now but would be even more valuable in a  crisis (fuel shortage = empty grocery stores). He doesn't mention diversification of savings too much. L = liquidity which he applies to everything. Mobility is a key part of the SALT in responding to a crisis. Maybe crime/riots go up in your area, state, or country. Maybe the banks shut down as they did in Greece for weeks. (Greece happened after the book was written.) What do you do? You go. This is the opposite of the prepper/bunker down mentality.  Do you know the languages of the countries closest to you? Do you have a passport? Do you rent or own your home? At the end of the book in FAQ: Do you have money in the other counties? This is where the diversification of savings comes in, putting money in other countries. This is harder now than when the book was written and most likely will require travel. Back to Greece, with all the banks closed and bank cards froze, it was only people with foreign bank cards that could buy things. T= truth that comes from the Bible. There are more tips in this section as well. Take care of yourself and your family first. He doesn't spend a lot of time on it, but from other material, I've read this would include having your own supply of medician, getting as fit as you can right now to get off of medician, etc. Live rightly even in bad times (no stealing, etc). Do not live in fear, trust in God.

      That's about it at a high level.

      Like 2
      • Ellen Waters
      • Making progress on my desired goals!
      • ellen_waters
      • 8 mths ago
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      Khaki Storm Thanks for the in-depth book summary.  It really makes one really think.  We do grow all of our own fruits and vegetables on a regular city lot.  I pressure can, do water bath processing and dehydrate every food that I can.  My pantry is about 2/3rds where I want it to be.  Pay check wise, we are just 6 weeks ahead in our finances.  Just trying to anticipate and be ready for any contingency that occurs this year.

      Like 1
      • Khaki Storm
      • YNAB book topics online: https://support.youneedabudget.com/r/q5w48j
      • Khaki_Storm.1
      • 8 mths ago
      • Reported - view

      Ellen Waters Cool! See, you're already working on it. Our first steps on this were passports and a neighboring country bank account. Another one I'd like to work in is learning another langauge.

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  • From my perspective, the type of debt matters in this case (since you already have $1,000 in savings for emergencies).

    If it's debt that has no upside (i.e. interest paid can't be used to reduce your income tax liability), then it's probably better to pay off the debt before putting more toward savings. 

    On the other hand, if it's debt that does have an upside, then concentrate on building up your savings, putting your mind more at ease.

    Ultimately, there isn't any ONE right answer to this question. It's a personal preference situation, and what you ought to do can really only be answered correctly by you. What is going to make you feel most secure, and able to sleep at night?

    Like 3
      • Purple Foal
      • Purple_Foal.3
      • 9 mths ago
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      • Reported - view

      Krys Like stated above, it depends upon the debt (mortgage, student loan) & the interest rates. No debt is good and the compounded interest benefits the creditors not you. I'd say save & pay off debt, but the priority should be debt since interest rates will go up again. Historically, we are at a record low. Mortgages used to be 14% up to 22% in the 80's & now they are 3%. If your debt is consumer debt, even consolidated into a LOC or HELOC, like I have, get rid of it. Then start fresh debt-free. But have your EF & buffers in place. 

      Like 1
  • This question for me depends on how much the debt is costing. There are plenty of places you can figure out the cost of debt (like undebt.it). If that 9K is costing you a LOT every month, then it's not worth putting it on hold to save up funds. It would be far better to get it paid down and then start saving up money. In the greater scheme of things being able to pay it off in 4 months is FAST. Way faster than most people can manage to pay off debt, frankly.

    However, if it isn't costing you anything, then I wouldn't stress about it that much, and focus on saving up money. My BF currently has about $5000 in debt which we keep chipping away at and rolling over to a different zero interest balance transfer every time the promo period ends. It cost him less than $200 to move it over to a new promo this month, and he'll have zero interest for the next year again, so we'll simply pay the minimum payment and let it sit there so we can focus our efforts on much more pressing matters.

    Like I said - paying off 9k in 4 months is really fast. If you think that in 4 months there's going to be something that you would really absolutely need the money for (and wouldn't want to take out loans), then yes, focus on saving while working on the debt. But if you can make it just 4 months, then ditch the debt and then start focusing on the savings.

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  • Hi, thank you for taking the time to reply and share with me your insights.  All great information.  Yes, I agree that it is a personal decision ... but I've been frozen in a way ... not wanting to decide (take action) as I feared making the wrong choice for us this volatile year, and I was still on the fence.  However, after pondering your suggestions ... I believe now I will jump off the fence and split the difference; half in savings and half on my 4% int bank loan (which means I'll still be debt free in 8 months instead of four).  I believe I can live with that.  Thank you for helping me to decide.  😐 

    Like 4
    • Ellen Waters That's still really fast to pay off that amount of debt! Kudos to you for being able to plan and do it!!

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      • Ellen Waters
      • Making progress on my desired goals!
      • ellen_waters
      • 8 mths ago
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      farfromtheusual We are retired and have cut our spending to the bare, bare bones and cancelled ones that we could do without for this year.  It is super tight, however, it has to be done to meet our goal.

      Like 1
  • Make sure you have a good emergency fund then pay off debt.  The exception would be if the debt has a very high interest rate (>8% ?), then pay that off first. Or at least agressively while building the emergency fund more slowly.

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  • I was doing the Dave Ramsey baby steps last year, but this year I decided to do my own plan and now I'm saving and paying off debt at the same time.  It will take me longer to get out of debt, but I will not have to then wait to build up my emergency fund, I will just be making it a bit beefier.  I'm also maxing out my Roth IRA this year after not putting anything in it for a year.  Feels good to be paying off debt and also saving, but it's entirely up to you which you do.  I'm paying slightly more interest on my debt to save while paying off debt, but I decided it was worth it to build up my emergency fund at the same time so I am less and less likely to need to go back into debt the closer I get to being out of debt.

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    • QC
    • HaplessFinanceProfessional
    • Queenofcoin
    • 8 mths ago
    • Reported - view

    I personally don’t think there’s a wrong choice. Additionally the worst choice is to do nothing. 
    Both options have risks. What is key is thinking about how you would manage the risks of both options, weighing those decisions in with the options and then committing to the plan you decide to run with. 
     

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  • Annieland said:
    I don't get it. What global issues?  All I see is a booming bull market and trade deals left and right brightening my every morning 🤑 🤑 🤑.

     Can I just mention how incredibly stupid I feel right now?  Like, really, really stupid.  Sorry. 🍳🤦🏽‍♀️🍳

    Like 9
    •   Annieland I vaguely remember thinking something similar when I read the title two months ago...  Feel stupid too. On the other hand: we weren't alone...  to say the least. Otherwise this definitely would have been handled differently.

      How very ignorant we all were. So yes, stupid, but apparently quite normal too

      😕🙃

      Like 2
      • WordTenor
      • I have the honor to be your obedient servant
      • WordTenor
      • 6 mths ago
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      Annieland I’m glad you made that comment and I’m glad it was preserved. It’s important to be able to look back at how everyone was feeling, because it’s important to remember that the market never flies high forever. 

      So thank you. You articulated what many of us were feeling at the time, and there isn’t anything wrong with that. It’s now here so that we can all remember and learn for the future.

      Like 5
      • Superbone
      • YNAB convert since 2008
      • Superbone
      • 6 mths ago
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      Annieland Now let's hope nobody here panicked and took all their money out of the stock market. This too will pass and I have no doubt the market will be much higher in the future than at its highest point to date. Just like it always has since the beginning. Plus, we're getting great deals now if investing regularly like in a 401k plan.

      Like 2
      • Ivory Storm
      • Ivory_Storm.3
      • 6 mths ago
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      WordTenor i hope people do remember, in november. This is a political failure of the highest magnitude. I am processing my feelings of anger for people who have supported this leadership due to their booming stock portfolios and disregarded other indicators of human health and well-being. 

      Like 1
      • PhysicsGal
      • Nerdy female homo sapien
      • physicsgal
      • 6 mths ago
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      Ivory Storm I'm not sure if this is a rule on here, but I have mostly not heard people proselytizing their politics on here so it hasn't been an issue so far.  On the Bogleheads forum there is a rule that political opinions are not to be discussed and I really appreciate that.  I really don't care what your politics are, but I think we need to stick to personal finance and related topics in a politically agnostic way on here and keep our ideological beliefs to ourselves.  It's not helpful to anyone when you say something this divisive. 

      Every side of the political isle needs to mind their money, so there is no good reason to bring your politics on here.  I realize this is a lot to ask for some people who have very fervent political beliefs, on both sides, but it is really the best for us all on here, IMO.  If you want to have a political discussion, I believe there are actually quite a few places online for you to express your beliefs without it risking the ability of regular people who just happen to have brains who work differently from you being able to absorb important personal finance information.  

      Thanks for listening.

      Like 2
      • Annieland
      • YNABbing every day since 2009!
      • Annieland
      • 6 mths ago
      • 2
      • Reported - view

      PhysicsGal I applaud your ability to reply to her so intelligently and eloquently. Unfortunately, I wasn’t able to so my reply was briskly deleted by the mods. Which is totally understandable, as it was WAY outside of my normal online temperament.  
       

      So thank you for your reply which I concur with. And thank you for using more than the two words I did. 

      Like 2
  • If the 1968-1969 Hong Kong Flu Pandemic (which I lived thru) serves

    as any kind of milepost we are only in the first or second inning of

    living thru this beast; our extreme measures of economic shutdown

    and social distancing did not occur in 1968 so indeed we may flatten the

    infection curve significantly this time; I just hope the cure is not worse than

    the disease itself and that we all can come out on the other side of this 

    https://www.cdc.gov/flu/pandemic-resources/1968-pandemic.html

    Like 1
  • What is the interest rate on the debt?  That's an important part of the calculation.  If it's a credit card with typical ~20% interest rate, I would pay that off first.  I also have $9k debt left, but it's a HEL at 5.85%, not a great interest rate, but much better than a credit card.  I'm planning to save up 3 months of expenses in my E-fund, then I will go back to paying 50/50 of my extra funds to paying off principle on my debt and increasing my E-fund.  But a pile of cash feels good right now.  If things go back to normal, I can always send it to debt whenever I feel like it.

    Like 2
      • Superbone
      • YNAB convert since 2008
      • Superbone
      • 6 mths ago
      • Reported - view

      PhysicsGal Great point! Different best answers to the OP question based on the interest rate of the debt. The higher the rate, the more emphasis should be on paying off the debt versus saving and vice versa.

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  • I'm so glad to have found this thread! I was torn, as there's merit to both. 2020 was slated to be my second year of agressively paying down debt, but COVID-19 kiboshed that. I compromised by paying off both CC's ($1,900) and am now saving half of each pay for True Expenses/Income Replacement. I did round up the minimum payments by 5% for both my LOC and loan - an extra $34 per month that I can handle. Half of May is already covered, and half of April's last pay will cover the rest, which is a big relief.

    I agree that the interest rate and size of each debt needs to be taken into account. When in doubt, I split half of what I have available between debt and savings until I decide on an action plan.

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