How Much Do You Save When You Are In Debt?

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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!

    ***Photo courtesy of


    1. Canadianbudgetbinder says:

      We don't have any consumer debt but if we did you can bet that we would have an emergency fund even if it was only $1000. Some people don't like to hang on to any money in the bank and that's fine but we enjoy knowing there is cash when we need it, if we need it. Great Post. Mr.CBB
      My recent post Mr.CBB’s Chocolate Peanut Butter Balls

      • Thanks CBB! I think anyone with a plan when it comes to their finances can generally be successful, so if your plan includes $1000, and your reasoning for it makes sense, it's going to help you financially. For me right now, it's getting rid of the last of my high-interest (about 10.5%) credit card debt, and then working on the rest of my goals after that.
        My recent post Weekend Reading Guide: Never Read a Tom Wolfe Book I Didn’t Like Edition

    2. What I have done, now that I have my car loan, is build up my other savings accounts to a level at which I would prefer them (including an emergency fund), and after that was achieved, start throwing all extra cash onto my loan.

      My loan is relatively low interest, though.

      • It's definitely nice to have cash reserves. I think for me I have been lucky not to have any major expenses, but now I do have some coming up, so it's time to start setting aside money not just for debt.
        My recent post Weekend Reading Guide: Never Read a Tom Wolfe Book I Didn’t Like Edition

    3. studentdebtsurvivor says:

      Right now the only debt we have is our home (condo). We have a fully funded emergency fund, but if we didn't and had debt I'd save at least $2000 in emergency fund.

      • It just seems like that money could be working for you in some way if you are somewhat comfortable financially, instead of earning a minimal interest that gets taxed at the end of the year. IMHO 🙂
        My recent post Weekend Reading Guide: Never Read a Tom Wolfe Book I Didn’t Like Edition

    4. Interesting post – My wife and I were ~ $370,000 in debt ($220,000 in mortgage) just six years ago and did not have an emergency fund at all and did not have a category savings account for those yearly expenses that you know about. Reading the Total Money Makeover by Dave Ramsey was the turning point in our finances and I feel his 1st Baby step is VERY important. $1000 Emergency fund and $2000 if you make over $100K. I am glad to hear you went 18 months with only one emergency over $1000 but am sure is not the case with most families – especially with a couple of kids like us. If you have NO savings at all and you need a new transmission for your car or a new hot water heater like us where do you get the money to pay for the emergency?? We just used our credit cards again.. We built up an emergency fund then started our debt destruction plan (snowball) to get rid of all consumer debt. Once we tackled that we built up a 6 month emergency fund (earning 1%). In addition we did always contribute 15% to our retirement plan and the workplace matched 5%. I also had built up a 40 year pension through my teaching in California and Colorado. (that was all auto deducted – very important) This last month we were down to $25,000 on our mortgage so we took that from our savings to pay it off and become completely debt free and freed up an additional $2000 per month that we will be putting back in our emergency fund until we reach $20K. Then we can start investing more. Starting @ 55 years old and now am almost 62 and we are debt free. The grass does feel different to walk on and instead of being in the $1.22 club (spending $1.22 for every dollar we make) we are in the 50-50 club (give, save, and invest 50% and live on 50%) – A little less stress in our life now. Good post though and certainly food for thought hence the long comment.
      My recent post The House that Mike and Christy Harvey bought for cash

      • Jeff, what an AMAZING seven years your family had! Your story is exciting, and I definitely agree that families have more expenses, and I am lucky that I am single and in debt, so I can get out of debt faster before I get married. My coworker was just telling me about how they got out of debt, and 6 months later their AC broke, so they had to go back into debt to get a new one. I don't want that to happen to me/us. But I know that if I have increased income and decreased expenses, most things like that can still be paid for within a month or two. I also am a big fan of the pre-tax automatic contributions- I have always done at least 10% of my income, and am planning 15% when my retirement plan starts for my new job in a month!
        My recent post Weekend Reading Guide: Never Read a Tom Wolfe Book I Didn’t Like Edition

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