Save or Pay Down Debt?

[financialpeace]

I am getting laid off at the end of September. I will be eligible for unemployment. We already pay all of our bills out of my DH's income. My income has been used to pay extra on debt and for extras like vacations. We have about $4000 in total savings.

Should I be focusing on saving or paying down debt? We have two car loans at low rates but fairly high payments and three student loans with small payments. We may sell one of the vehicles if it looks like it will be awhile before I get a job. My DH's job is pretty much as safe as a job can be and he has lots of opportunity for overtime.

Thoughts?

[Peace77]

I would split it. Use part of your pay/unemployment funds to pay extra on the debt and part to increase your emergency fund.

Focus your extra to debt to either the highest interest debt or the smallest amount of debt. It works best to pay off one debt than to pay an extra $20 to all of the debts.

[nalto]

So basically your unemployment would go to either savings or debt, while your DH's income goes to monthly household bills? Does he ever have cash left over that can be saved while your unemployment kills the debt?

If he doesn't, I would suggest saving just a bit more until your are laid off, then focus on the debt with the unemployment.

[zibazinski]

Income and outgo? Need more info.

[financialpeace]

I am not looking for a full budget analysis. My DH's income is sufficient to cover all household bills and irregular expenses and about $150 toward general savings without any OT. My money is extra that we have used for paying on debt, travel, or any extra toys we have wanted. The $4000 would last us about a month and a half if neither of us had any money coming in at all.

I was thinking about stashing all the money into savings at first. My minimum savings balance would be $5000. Any time I reached enough over that to pay off one of the debts, I would pull the money and pay the debt off. That way the money would be on hand if we needed it and not tied up in a loan that we are still having to make payments on.

I like the satisfaction of debt balances going down quickly though.

[financialpeace]

We do not have any children, so no possible unexpected expenses there.

[busymom]

First I would suggest trying to see where you could do some budget cutting now, rather than when you're out of work.

I do like peace77's idea of going 1/2 towards debt, & 1/2 into your emergency fund, but if your total balance of your emergency fund is $4000, perhaps it would be best to put all of it into the EF. Of course, if any of your debts could be completely wiped out by paying $1000 or less, it might be nice to have one less monthly payment to worry about. (This advice is general, since I've got none of your numbers to work with.)

Best of luck in your job hunt!

[financialpeace]

We are working on budget cutting already. Any OT and any savings from budget cuts will automatically go toward the EF. That money won't be considered as available for extra on the debt. I am hoping to end up saving $300 to $500 per month out of DH's income, but I'm not going to count on this. I'm going to assume a worst case scenario that budget and his income stays the same.

[dragon2008]

I'm sorry to hear about your job loss, financialpeace, but it sounds like you are prepared for it financially.

Although paying down debt is fun, I'd save your unemployment in case of emergencies over $4k or if it takes longer than expected to find a better job. Once you get that great job, perhaps you can make big payments to your debt with some of the saved money, so your debt gets paid down too.

Good luck with the job hunt - I hope it is short with a great outcome!

[startsmart]

I would aim for at least 2 months in the EF first, better to have 3 to be safe. That's $7800 if I'm doing the math right or roughly double what you have now.

Then continue to cost expenses and look at ways to replace your income to snowball the other debts.

If you're underwater on the cars focus there first so if you need to sell one you'll actually get cash out of the deal.

Then student loans. As long as you're paying minimums on time your credit is not going to take a hit so the more you can save until that income is replaced the more stable you'll be.

Remember, they can close lines of credit anytime, it's much easier to manage when you have cash available.

I think I left notes for this on the July no spend thread but don't forget all the cost savings when you're not going to work:

• reduce car insurance coverage on vehicle sitting at home
  
• wear older clothes around the house and save nice clothes for interviews
  
• make more things at home, clean up to see what you have on hand, cut down on convenience food
  
• shop around for your biggest expenses (insurance, internet, cell phones) and look for ways to cut back on others (entertainment, gasoline, household items
  

And definitely give yourself a huge pat on the back for being in this position - most couples wouldn't be able to make things work on one salary so at least you're asking what to do with extra money, not how to cover the bills!

[qofcc]

Since all of your debts are installment loans not revolving, I like your idea of building up a larger EF before paying extra since your minimim payments won't go down, provided all debts are at reasonable interest rates. If you listed the loan amounts, minimum payments, interest rates and the amount of unemployment you expect to receive, we could give better suggestions. No need to disclose your entire budget.

If you had any thoughts about refinancing your home or cars, now would be the time to do it while you're still employed. Rates are still low and stretching out the car payments could help your cash flow provided you could do it without increasing the interest rate.

[financialpeace]

Car loan rates are too low to refinance, and we rent, so nothing to change there.

2003 GMC Sierra: about $13,500 at 3.65% min pmt $260
2011 Subaru Outback: $16,082.95 at 2.9% min pmt $330

I'm not sure the exact rates on the student loans but they are all between 6 and 7 percent.

SL1 (mine): $4681.73 min pmt $61.07
SL 2 (DH's): about $4500 (I'm at work, so I don't have an exact figure for this one and can't get it from here) min pmt $61.07
SL 3 (DH's): $13,812.25 min pmt $136.47

I forgot to mention that I will be getting 8 weeks severance pay plus 2 weeks of vacation paid out. I'm not sure how much they will be taking for taxes and things. I'm estimating conservatively (I hope) that I will get $4000. That will automatically go to savings which will bring us up to the $8000 that startsmart suggested.

If we sell a vehicle it will be the truck. We are a little underwater on it, but the extended warranty was rolled into the loan. I didn't want DH to get it, but oh well. It can be canceled and the remaining portion refunded. I would expect at least $1500 if not $2000 from that.

Now I'm kind of thinking that we should get our savings to 10K and then focus on debt payoff but still contribute some to savings. I get more satisfaction out of debt payoff than savings. It seems like the savings can disappear so fast that it just doesn't give me the same sense of accomplishment.

[reeneejune]

Do you know yet how much you'll be receiving in unemployment?

If I were in your shoes, considering the stability of your DH's job and his ability to make extra money through OT if needed/wanted, I'd leave the EF at 3 months for now and focus on debt repayment.

With that said, I recall from other discussions that your DH is a "truck guy" and feels that his current truck is a bit of a downgrade. Knowing that, I would suggest throwing the unemployment money towards the truck loan so that it's (hopefully) not underwater if/when it's sold.

After that, I'd attack the student loans since the interest rate is higher on your student loans than on your vehicles.

Overall, you're in a great position financially. I know it stinks to lose your job, but at least you've got enough resources that you can be asking the "savings vs. debt payoff" question without worrying about everyday expenses.

[financialpeace]

I'm not quite sure how much I'm going to be getting for unemployment. I think the estimator said around $300 per week before taxes are taken out.

Yes, DH is a truck guy. However, he will not be trading the truck or anything like that while I am unemployed. We may sell it and make due with one vehicle until I'm established in a new job, but there will not be a new truck replacing it. I have a separate account started with funds in it specifically for vehicle expenses. I will pull from that if we need to if we decide to sell the truck.

The student loans have been my focus for debt payoff. We had two others that I have paid off in the last year. I am considering focusing on my car after my remaining student loan is paid off, though. My DH is wanting to go back to school in one to two years. He will not be allowed to work while doing the program he wants to do. That means I will be our sole provider. We really want to keep my car and I don't think we will be able to with that high of a payment. We can always defer the payments on his student loans while he is back in school if we absolutely needed to. There is a lot to weigh here as far as what my priority should be. I don't want to put much toward the truck. As long as we can break even when we sell it or have enough funds on hand to make the deal, I will be happy. If we get any equity in it, DH will want to trade it. I'm scared of sinking a bunch of extra money into the car and still not having it paid off. Maybe I should just save the money and if I get enough over a certain threshold to pay it off, I can do it at that time. I'd pay more interest, but it would be less risky.

[financialpeace]

My DH has been "let's have a baby" lately, though, so I really have no idea what the future looks like for us. It could be school or it could be a baby or it could be no change. I think that's why I'm having a hard time figuring out what my priority is. I'm not sure if it's better to maximize savings, eliminate debt, or a combination of both when the future is uncertain. I think I'm leaning toward doing both, though.

[stanthedevil]

Without knowing all the intimate details of your finances, I'd look at focusing on the car loans first. Even though the interest rate is higher, if you make less than 120,000 (married, filing jointly), student loan interest is a deduction that comes right off the top. Crunch the numbers because it may pay off in the long run since the interest on the car loan isn't deductible.

[haapai]

Switching from debt payoff mode to layoff mode stinks. It looks like you've eliminated the low-balance, high-interest, short-term debts that might be worth paying off with your remaining paychecks and/or severance.

The only potential hack that I see is possibly making several months of payments on one of the vehicles and I'd only propose that if I was certain that doing so would advance your next payment or make selling the vehicle possible.

I don't think paying off the smaller of your husband's student loans would do a thing for your financial stability, no matter what the rate is. (I'm assuming here that he hasn't used up the unemployment deferments on it.)

I'd recommend saving every scrap of pay information from your job starting now. Once you the job is finished, it can be quite difficult to get your hands on that information before your w-2 arrives in February. About a month after your job ends, you will become quite interested in the adequacy of your withholding or interested in the size of your refund. Having that pay information, including any amounts that went toward health insurance, will be very, very helpful.

I'd recommend getting an unemployment deferment on your student loan.

When you get a job again, you may want to prioritize paying off the vehicle loans despite their low rates and intimidating balances. They are destabilizing you and blocking your husband from going back to school. (You may be able to see this by pumping out some amortization tables showing different payoff targets. Putting extra money toward the vehicle loans instead of the student loans gets you to a much more comfortable place so much faster than attacking the student loans first, that it's probably worth any extra interest that it may cost.)

It sounds like even in unemployment, you'll still be paying down quite a bit of debt each month. If you track equity or net debt, you'll see this. You may not like the pace, but the momentum is still positive.

[qofcc]

Since you're so up in the air about your choices, the safest thing would be to just put the money in savings. If the vehicle is underwater when you go to sell it, you can just pull from savings. I doubt if you'd be able to re-finance the car loans to a similar low rate. Have you looked at all of your different payment options on the student loans including consolidation, income based repayment, etc?

[financialpeace]

Some conflicting opinions here. I guess it all depends on what my priorities are and what my risk comfort level is. I appreciate all your thoughts on this, and I will mull it over.

[spartan7886]

Don't forget to adjust your DH's withholding to account for your lowered income. That will free up a bit more money as you go instead of waiting until April.

[salserabarby]

Aug 24, 2011 10:58:50 GMT -5 haapai said:

I'd recommend getting an unemployment deferment on your student loan.

I wouldn't recommend this as an option unless you are trully struggleing and it seem your information that wouldn't be the case. If you put them on deferment it still accrues interest and when you start paying you'll end up paying so much more.

I would consider increasing your emergency fund 3-6 months whereever you feel comfortable. Then you can make a budget that includes your hubby's income and your UI. If I were in your shoes, after the emergency fund is setup then I'd start on paying the car that you would consider keeping. Since this is the only debt that doesn't have the option of not paying on it, either through deferment of selling.

[haapai]

I think that if she got an unemployment deferment on her student loan she'd receive a quarterly interest statement and the option of either paying it or having it capitalize. It's usually a good idea to pay the interest since it keeps the balance from growing and it is often deductible before the line.

I don't know what would happen to her electronic payment discount if she applies for an unemployment deferment. It's possible that she would temporarily lose her quarter-point discount.

I've always wondered what happens when someone with a fixed-rate student loan makes payments to principal while their loan is in deferment or forbearance. It's clear to me that if you don't pay the interest, the balance will grow and when the loan enters repayment, a new (higher than before) payment will be calculated. What isn't terribly clear is what happens when you make unnecessary payments which reduce the principal during a deferment or forbearance. It seems to me that a new payment would have to be calculated in this instance also. If FP has been making extra payments to her SL, this might be worth checking out.

Some other hacks might emerge in the process of learning more about deferment options. There's probably a difference between the interest rates that FP is paying on her student loans and the rates on her husband's student loans. Maybe SL1 should be targeted for elimination ahead of SL2, despite the fact that SL2 has a slightly smaller balance.

Yup, paying off debt certainly is a lot more interesting than saving for a rainy day.