How Much Do You Save When You Are In Debt?

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consumer debt, credit card debt, debt payoff, debt reduction, saving money

The following is a post by MPFJ staff writer, SK. SK writes about the reasons we get into debt, changing the patterns that get us into debt, and examines small business ownership and real estate investing at her blog, American Debt Project.
When it comes to getting out of debt, I am not an expert. 

I do have personal experience with it, as I just passed the 50% debt payoff mark, but I am not so vain as to tell you guys that I have found the way to get out of debt and my way is the only way!  

To successfully get yourself out of debt, I think the opposite is true. You have to find a way to get out of debt on your own, and implement your plan wholeheartedly to make it work. For many people, saving money when getting out of debt is counter-intuitive. If you are not actively investing that money, it’s simply sitting there as cash or earning measly 1% interest, while paying off debt means you are getting rid of a liability with interest rates anywhere from 6% (student loans) to 29.99% (really sub prime credit cards). 

So why should you have any money saved when you have debt that is costing you more money? Let’s consider both sides of this issue.

$1,000 Emergencies Happen All the Time

This is a Dave Ramsey tenet of financial wisdom. Basically, Ramsey says before paying off debt, you should set aside $1,000 to be able to deal with unexpected emergencies without using a credit card. 

But, let’s consider my case. In the 18 months since I got serious about paying off my debt, I only had one unexpected expense over $1,000. I decided to pay off my car 9 months ahead of schedule because it significantly reduced my monthly bills and improved my debt-to-income ratio. I’ll admit, if I hadn’t set aside that money in savings, it would have been tough to make this move. However, it was not an emergency. It was me making a decision to not let my savings just sit there. I’ve had some situations come up over the past 18 months (including lending someone money), but I was able to manage it within my normal expenses and some scrimping.

Do emergencies happen? Yes. Anything can happen! But in my case, I think it makes more sense to use $1,000 productively when you have over $20,000 in debt (I currently have about $18,000 in debt left to pay off). In many instances, you will have a few days to deal with a situation and can round up the money needed by delaying payment on other items.

You Don’t Want to Have Nothing When You are Finally Debt Free

I have heard others insist that it’s important to have savings so that when you are debt free, you are not back at zero, where it is easy to fall back into debt. Although I contribute at least 15% of my income to my retirement accounts, other than that, I will likely not have very much in savings when I pay off all my debt.

Am I afraid I am going to right back to my old habits and charge up a storm on my credit cards? No! Because that’s exactly the point, I am not afraid anymore. I have been arm-wrestling myself daily for the past 18 months to get over bad habits and impulsive spending. It’s OK to be nervous about the next step when you are finally consumer debt-free, but it doesn’t mean you have fear. You are strong enough to do what you need to do. I personally think the $1,000 buffer is just a mental pacifier, meant to soothe you into thinking you “have things covered”. But you might not always need it and that money could be better spent elsewhere.

What do you think? Are you saving and paying off debt? Are you just paying off debt with no savings at all? Let me know!

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