Mulling over savings vs. debt paydown

**warramra** · 02-01-2008, 11:22 AM

In regards to the changing economic situation and since economists are coming out of the woodwork(finally) that it is going to get worse, I've been mulling over some shifting in priorities for our money. I am wondering if I am totally crazy for considering some of these ideas.

First of all we have paid down $11k in debt over the last 18months. We still have approximately $5k on one credit card and $9k left on a car loan. We also have our house payment and an equity line (that was used for home repairs and updating), which I am not worrying about at this point (our combined payment including escrow is still much less than current rents in our area and our debt to equity is very low since we bought low 10yrs ago). On the bad side our EF has taken a hit these last couple of months with unexpected medical expenses.

Over the next couple of months we are looking at getting about $6k in refunds and bonuses (not including the gov rebate). There are lots and lots of options and different ways I can play with the money but I'm going to throw out some that I am leaning towards.

opt.1 $1000 in EF and pay off credit card
this will give us the baby EF and $150 snowball onto car payment leaving us with about 18more payments on that. This option is fine if the economy keeps going at about the same rate and DH doesn't lose his job

opt. 2 $3000 into EF, $3000 onto car payment, transfer the credit card balance (15% interest rate) to equity line (prime +2%). This gives me more comfort in that we have a larger savings account. We can pay off the van in 10 months, after which we can build up a full EF and attack the equity line quickly as the van payment is a large monthly expense.

opt. 3 Put everything into our EF and just continue the monthly snowball on debt as normal. This will give us 3 months of bare bones living expenses if things get bad. But, we will continue to carry debt for the next two years.

My gut is really leaning towards option 2. It gives me more peace of mind because we will have the extra cash if needed. We could possibly pay off the van in six months if other things fall into place. I have heard all the negative thoughts on debt consolidation and understand the fears. But, we don't use cc anymore and I do realize I'm just transferring the debt. If we have no other debt making the house/equity line payment should not be a problem even if we only have half of our current income.

I should say that I am one of those who do believe that we are going to be facing a prolonged recession or even modern day depression. In fact it was the economy's warning signs almost two years ago that got us going on trying to get rid of our debt and live more frugally. This is probably why I am leaning towards #2. It moves the debt around and reduces our monthly minimums - basically liquidating our cash.

I've gone on too long, basically I'm looking for some ideas to get our ducks in a row considering the economy and not based on what worked last year. Thanks in advance for any input.

**McD** · 02-01-2008, 11:32 AM

I personally like option two as well. It helps give you peace of mind and it will allow you to reduce the interest on the credit card. Prime is 6% right now, so your rate on the equity line should be 8%. that's a lot better than 15%.

**danni** · 02-01-2008, 12:24 PM

I like option 2 the best too. Lowering the interest is a good thing and having that extra money in the savings is a big plus giving you some peace of mind.

**StaceyS** · 02-01-2008, 12:27 PM

I agree. #2 sounds like the best option for your peace of mind. That is what really matters.

**ironmaiden** · 02-01-2008, 12:41 PM

You didn't say what the interest rate on the vehicle was?

Also what type of work does your DH do?
In other words what are the chances of him being laid off and of finding another job and how quickly?

I do think that if you will sleep better, that having the cash in the bank is the better option. Also, it's not like if things improve that the money is "gone" and you can always use it towards debt later on.

The reason why some poo poo rolling debt together is that some people charge those cards right back up once they are cleared. You know your history and tendencies of both of you to know whether this is a possibility or not.

On another note, they do say if you think you'll be getting laid off to open up a line of credit - while you are still employed - and only to use it in case things get bad.

**warramra** · 02-01-2008, 12:59 PM

Originally Posted by ironmaiden

You didn't say what the interest rate on the vehicle was?

Also what type of work does your DH do?
In other words what are the chances of him being laid off and of finding another job and how quickly?

I do think that if you will sleep better, that having the cash in the bank is the better option. Also, it's not like if things improve that the money is "gone" and you can always use it towards debt later on.

The reason why some poo poo rolling debt together is that some people charge those cards right back up once they are cleared. You know your history and tendencies of both of you to know whether this is a possibility or not.

On another note, they do say if you think you'll be getting laid off to open up a line of credit - while you are still employed - and only to use it in case things get bad.

The loan on the van is 7%. I feel convicted to get it paid off as quickly as possible as our second car (paid for) has 270,000miles on it and we don't know how much it has left in it. We will need to own at least one car and this one actually fits the whole family at one time.

The thing is I want to do away with debt period and I would love to be like some people right now who are totally debt free including their homes. But, I'm trying to be realistic for us. I just feel that it is more important to have the van paid off and then worry about everything else.

I'm not super worried about DH's job, at least not right now. It was announced a couple weeks ago that they are finally getting bonuses this year (the last two years they haven't had any) and they are allowing overtime again. The company is diversified in markets enough that they have been really steady even during the past year. If the economy tanks, well then he isn't in a 'protected' profession. The good news is that DH and I don't mind hard work and if we had to piece together little jobs to make it we would.

Thanks so much everyone I really thought most would think I was crazy for considering option 2.

**leezza** · 02-01-2008, 01:49 PM

Amy,

I like Option # 3, until after the 08 olympics in China.....just to see how things will shack out.....in fact maybe until a few months after the election to see what the markets do....

As someone else said it's not like the money will be gone, it will just be there if you need it.

Good Luck with your decision : )

Have a great day,
Lisa

**Samigirl** · 02-01-2008, 02:16 PM

If I were in your position, my choice would be #2.

**EmilyD** · 02-01-2008, 05:19 PM

I also agree with #2.

I am currently doing the same thing because I think it makes the most sense.

Today, I paid off one credit account, made an extra $75.00 payment on another credit account.

I put $500.00 into our EF because it was drained. There are three paydays this month, so I plan to put in $250.00 for the next 2 paydays and that will make our baby EF. DH got a bonus and so far the overtime hasn't been taken away. As long as we get the overtime, next month I will start assembling a Freedom fund with the extra.

I am also actively pursuing a claim that has been dragging on for 18 months. We could get enough to settle all our medical bills and pay off or down several other bills.

**peanut** · 02-01-2008, 07:12 PM

I'd go with option 2 as well. If the economy were singing, I'd be hauling for a combination of option 1 and 2...Transferring to lower interest rate, but paying those suckers off! Especially the van. But you Americans look like you might be in for a rough ride the next while.

Interesting side note: I listened in on a conference call from my bank, claiming if the US has a recession, it'll be a weird one and short...there simply isn't a long lived excuse for one...all the indicators aren't where they're supposed to be in a recession...according to the bank...where my investments are down 7%. But hey, that's better than being down 19%, like the Canadian stock market currently is!

Jean

**Daisygirl** · 02-02-2008, 07:02 AM

I like #2 in your situation as well. I feel much safer having some money in the bank. I am doing nearly the same thing with my own tax return.

**my4littlebuffaloes** · 02-02-2008, 01:18 PM

Actually I like option #1. Yes you would only have $1000 in the EF, but when you get the gov rebate, you could put the whole $2400 into the EF. Plus you could take the credit card payment and put that into the EF for awhile too, although adding it to the van payment would get that paid off pretty quick. If you do option 1 and put the rebate into the EF too, but snowball the $150 to the van in about 18 months you would have the cc and van paid off. good luck with your decision. It is good to have options isn't it?

**Telephus44** · 02-02-2008, 06:40 PM

Amy, I think a lot like you. I agree with Option 2 as well. The money is always there if you chance your mind and want to pull it out to get rid of the debt.

**Juto** · 02-02-2008, 07:03 PM

Build up your EF right now. Windfalls are nice to help pay off debt...but you never know when the wind will blow the other direction! Opt #2!

**Jill B.** · 02-03-2008, 09:09 AM

Is your HELOC tied into your house as collateral? If it is, I wouldn't pay off the cc with that. Yes, lower interest rate but if a bad recession hits, and you have trouble paying that, you could lose your house.

I think $1000 in the EF and than pay off the credit card. Those are not nice loans. I would than save another $1000+ for the EF until you feel comfortableespecially since you have an older car. Then work on the car loan.