Wednesday, November 10, 2010

Save or Pay Off Debt?

I enjoy Daily Worth emails. Today's tip reinforced what my instinct told me and I'm working on it...

A common dilemma: Should you put all your spare cash toward paying down debt, or build up your emergency savings - or a little of both?

It's a serious question now. If you lost your job, the average length of unemployment is about 33 weeks—or eight months. That means your emergency fund must be a priority.

But should it come first? Let's run some numbers.

Your monthly expenses: $4,000
Your debt: $5,000 on a card at 14% interest
You have: $500 to apply to debt, savings or both each month.

If you stashed $400 each month in your emergency fund, and made only the minimum payment on your card—that's $100, assuming a 2% minimum payment—it would take you more than six years to build up eight months' of expenses ($32,000).

And you'd still owe about $2700 on your card.

Now let's flip it. If you put $400 per month toward your card, and $100 toward savings, you'd be debt free in about 14 months—and you'd have a tidy $1,400 start to your emergency fund.

Now that's real savings, on every front.

1 comment:

  1. $1000.00 in emergency ONLY use for TRUE emergencies...the use every cent to pay off debt....if you use your emergency fund, you have to replenish it before you pay off debt....
    We haven't had a cc for over 2 years and there has never been a time that we couldn't use our debit card...we rented a car w/our debit extra fees
    I say pay off debt pay off debt! The most liberating thing you can do.


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