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Saving For A Rainy Day or Paying Off Every Penny?

  June 10

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rainy day fundI’m excited to welcome Shoeaholicnomore to the blog! She is a mid-20s single girl living in the Midwest who is focused on paying off her consumer and student loans, all while simplifying her life and closet. You can join her on her journey at Shoeaholicnomore. Enjoy her post below:

Around the PF blogosphere, you’ll hear lots of differing opinions when it comes to prioritizing between saving money for a rainy day or paying off debt with every last penny you can find.

Everyone’s situation is different. Some of us are single with no one to else to provide for or to provide for us, like me. Some are in a DINK relationship (dual income, no kids), which can provide more financial flexibility depending on the debt level of the couple. Others are married with kids to provide for, and lastly there are a few single parents among us too. Even after splitting the community into these groups, there are still no two situations that are the same.

Personally, I think it’s best to find a balance between saving and paying off debt that works for you. I’ve talked on my blog about wanting to hit $1k for my emergency fund, but after that will I quit saving each month and throw that toward my debt?

I have a long way to go to dig myself out of debt, but I’d rather take it a little slower and keep saving than find myself increasing my debt load due to an emergency that’s bigger than my $1k EF.

Benefits of Saving

There are some benefits of saving over paying off debt. One is peace of mind. It seems that the bigger the emergency fund or other savings account the more peace of mind the blogger feels. I haven’t yet reached my initial goal of having a $1k EF, but every time my savings account grows I feel a little more at ease and a little less stressed when an unexpected expense comes up.

You are (most likely) earning interest on your money. Now, the interest you are earning does not amount to much if you are saving in a traditional savings account. The interest you are earning is nothing compared to the interest rates charged on most credit cards, but regardless you are earning interest and you are learning to save and keep your hand off your money. In my opinion, there is nothing wrong with having some money sitting in an easily accessible account and leaving it alone; this is called self-control.

Benefits of Paying off Debt

Peace of mind still applies. As my debt balances get lower and lower I feel more comfortable with day to day life, and I like knowing that I’m making progress toward a goal that is changing my life forever.

Paying interest on your debts is obviously a negative, but by paying your debts off faster and thus not saving as much money in an account, you are paying less interest in the long run. But beware, this can backfire! If you put too much money toward your debts and something unexpected comes up, you may find yourself having to charge to your credit cards to cover the expense if you don’t have an EF.

For me and my situation, the benefits of saving and the benefits of paying off debt have to be balanced. Yes, I will not make progress as quickly on either goal since I’m tackling them both at the same time, but I know that and I’m okay with it.

Are you focused on paying off debt or saving?

Editor’s note: I think this is a great question and one that should be considered over and over again. I know I feel really secure when I have a big savings account, but that means not as much goes to debt repayment. What about y’all?

Saving Money or Debt Payoff? Which is right for you?

55 responses to “Saving For A Rainy Day or Paying Off Every Penny?

  1. I have needed to get my emergency fund established in order to relax more about finances. Even then, since I had to dip into it recently due to lower variable income, I’ve decided to increase my e-fund for more peace of mind. I had $10K, am now at $7800 but was lower. Once I get back to my original $10K, I’m carrying on to $15K. Good luck getting yours to your goal!

    1. I’m striving to hit $1k right now (baby EF) and am hoping to continue saving even once I’ve hit that number. Ideally, I’d like to get up around $5k before my debts are paid off.

  2. When we were busy paying off debt, we were gazelle intense! That was really the only thing we focused on. Now that we’re debt-free, we definitely save for rainy days, sunny days, whatever. I like to save money but am willing to spend on experiences and certain “things.”

    1. Now that you’re debt free, you can do pretty much as you please with your money. I still think saving is great, but it’s ok to spend a little too (as long as you’re still within your means, of course) 🙂

  3. Having an emergency fund really does make me feel secure. I am not saving as much now since I hit my goal with that, but when I was living with my parents after college, I do wish I had gone 50/50 with saving and paying off my student loans. Instead, I mostly saved, and put the minimum toward the loans. Now I know better!

  4. I like to see my clients take a balanced approach to paying off debt and saving. At the end, your net worth is balanced; however, it always makes people feel better to see a rainy day fund grow. It gives them breathing room.

    1. I am trying the whole balanced approach, no where near 50/40 though. Having savings does help me feel better when unexpected things come up, imagine how much better I’ll feel when I get my savings up to my goals! 🙂

  5. Dave Ramsey advises a $1000 emergency fund and then concentrating on paying debt, and while I sincerely admire and agree with him on most issues, I divert from his recommendation a little. Too often, when trying to pay off credit cards, mortgage etc., I would throw every spare penny at the debt, to the extent that we had very little left for saving. Inevitably, we would have an unforeseen expense and since we didn’t have enough in the emergency fund, of course the expense, or part of it, went right back on to the credit cards. A very self-defeating cycle! So I decided to do both at the same time. I increased the amount going into savings and still paid more than the minimum on the debt. It took time, but eventually the emergency fund got to the point where it could handle almost any hit that came along, and we got the debts paid off. The balanced approach gave me more peace of mind while achieving success in both areas.

    1. I agree with you. I followed Dave Ramsey until I realized $1000 wasn’t enough for us. So I did both, I saved $3K and then concentrating on paying my debt. It gave me peace of mind and I was able to pay things that came up without getting into more debt. When I’m asked how I did it recommend doing both ways.

      1. Right off the bat I want to get to $1k, but I don’t think I’m going to stop there. I think I’m going to keep putting a little here and there into my EF. I know that $1k is NOT enough for all emergencies that can arise when you are a car and homeowner.

  6. When we decided to pay off our student loans and a car early, we did the $1,000 emergency fund thing and it worked. Once those debts were paid off, we worked hard on building a proper emergency fund. Then, my husband’s car bit the dust before we expected, and before we could save up any cash for a new one. With two kids and an old house, I couldn’t bear the thought of emptying our emergency fund to pay for a car. So, this time around we are finishing off our full emergency fund and then we will knock out the debt (we financed a used car). We have a few months to go until our e-fund is fully funded for three months. One big difference is that the old debt payments amounted to almost 16% of our income, while our current car payment amounts to 4%. I still hate having any consumer debt, but it’s not disabling the way it was before.

    I also believe in continuing to save for retirement, even if it’s just the minimum to get the employer match. Had we halted our 401k contributions, we would have missed out on some really valuable time. Every situation varies, though. If you’re really drowning in debt, it might make sense to go more extreme and throw everything you can at it.

    1. Jen, I understand why you are going at it differently this time and it seems to make sense. You are in a much different (and better) situation now that you were in before.

      I have NOT stopped saving for retirment. I still contribute 8% of my pay, plus I get 8% matching from my employer. I couldn’t give up the matching money and the compounding interest, it’s too good to give up. But I don’t count that in my “savings” since I can’t touch that money before I hit retirment age (well I could, but the tax penalties would be huge),

  7. For me, I feel better having a mix of both- keeping an emergency fund handy while paying down debt. We have a small car loan now that we would like to pay off early, but I wouldn’t want to go without a savings just to be debt-free. I feel more secure keeping that e-fund.

    1. In my opinion, you are doing it correctly. Doing both with some balance seems to be the most popular and successful choice, but of course everyone still has to decide for themselves.

  8. Not only am I a BIG advocate of building an emergency fund, I think typically it makes financial sense to invest instead of pay down debt. If you assume an 8% average return on investment in the stock market there really is no reason to pay down debt unless you have an interest rate higher than that. The only other way to justify paying down debt instead of investing would be if you disagree with a historical 8% return on the stock market, or if you think you can predict how the market will act the next few years (and we all know how silly that has made some people look).

    1. I have heard/read this point of view before. Unfortunately, all my interest rates (except my student loan and my mortgage) are WAY above 8% interest. But, I’m still contributing some to my retirement and my EF.

  9. I’m a big proponent of doing both. It doesn’t have to be an either/or situation and shouldn’t be in my opinion. I get the urge to throw every cent at your debt but life is messy. Things break and unexpected things happen, both good and bad. I have seen people doing so well with their debt repayment give up after an unexpected expense wiped out all their good work because they had no emergency fund and had to use their credit. I think you are smart to do both, Kayla. I know that whenever I’ve needed to dip into my emergency fund that I am so grateful to have one.

    1. I understand why they gave up, it can be so frustrating to experience unexpected expense after unexpected expense, but I am glad I have some money in my EF. I am still working to build it at the same time as paying off debt.

  10. I have a decent amount of low interest student loans…so I’m leaning towards the saving/investing side. It would be different if my loans had a higher interest rate. But I agree with you…you can do a little of both.

  11. Great post Shoe! I’m paying off debt before saving but that’s what works for me. I’m terrified of pushing back my debt free date. My debt really annoys me and I want it gone as soon as possible so I’ve chosen to do it that way. I know it’s risky business but each to their own right?

    1. You are exactly right DBC, to each their own. Your method may work for you, but it would scare the crap outta me to try and go around without at least a small EF. Something to consider at least. 🙂

  12. I think the fact that we’ve got an emergency fund sorted means we can be slightly more relaxed with our money and where it goes – purely because we know we’ve got a back up if we need it. So, we’re trying to do bits of both – overpay the mortgage and save for the future. It’s a fine balance!

    1. Saving whilst paying off debt is all about balance and I agree, if I had only my mortgage left to pay on and a good sized EF, I’d feel much more relaxed about my money and my budget than I currently am. Things are pretty tight for me right now, but I am looking forward to them getting eased up a bit after I pay off a debt in September, that has a monthly payment of $150. That will free up some much needed cashflow, of course the majority of it I will snowball onto my next debt 🙂

  13. I consider paying off debt as a form of saving money. I’m saving a bunch of interest when I pay off debt. So because I have this view, my question to myself always is, “What will make my savings pay off more?” If I wipe out a credit card only to put the money back on it again, or if I have a disability and have lots of credit card debt, how did that help me?

    Nice post!

    1. This is a very interesting perspective Joe. I’m glad you shared it with me. It is so true that paying off debt is a form of savings (saving the money that would go toward interest). But you are also right that sometimes throwing every penny at your debt isn’t the answer either. If I don’t have an EF because I’m throwing every last cent at my debt and I wind up in an emergency then I will be forced to “un-do” my progress by charging to my card during an emergency.

  14. I exhausted all my savings to put towards a credit card that got charged up from a big immediate family emergency/death. That CC still has a balance of $7500, and that’s after I threw $1400 at it yesterday. Until it’s paid off, I’m directing all funds towards that and am getting over the anxiety (sorta).

    1. Meghan, I’m sorry about your having had a family emergency/death. That’s not a fun experience and I’m sure in that situation, I would do what needed to be done. Even though I have an EF (small, but building) it may not be easy to find time to access that money to transfer it to my checking account in that kind of situation. I would probably charge the expenses and then apply the EF funds onto the card too. Sounds like you made the right decision for the situation you were faced with. My condolences on the loss of your family member.

    1. The further and farther I get into my journey to becoming debt free, the more I realize that the idea of mind over matter is true. Personal finance and paying off debt is about the numbers, but the numbers are HUGELY affected by your mindset and emotions. Good thing it’s called PERSONAL finance 🙂

  15. This is definitely a major questions. Suze Orman says save for an emergency fund of 8 months, and Dave Ramsey says pay off debt while keeping only a $1,000 emergency fund. I try to be somewhere in the middle: have an emergency fund for a few months and then snowball to pay off my debt.

    1. Natalie, I am aiming for $1k to start with, but I don’t think I’ll quit saving when I hit it. I’d really like to save up to $2-3k while paying off my debts. Once the debts are gone, then I want to increase it even further!

  16. My husband and I have about 1.5 months living expenses saved (so 3 months if only one of us were to lose our jobs). I am in the debt repayment camp, but that’s in large part due to the knowledge that if something tragic/drastic were to happen we both have parents who would be willing and able to help us if necessary. I just hate the idea of paying so much interest, even though it’s just student loan interest. Once I’m done with those loans in a few years I’ll roll that money into savings. I want to get as many bills off my back as possible so it would be easier to reduce my living expenses if I have to in the future.

    1. That’s not to say we’re not saving now, just putting more towards debt.

    2. I got ya! I’m doing both, saving and paying off debt but its certainly not balanced. I pay around $600/month on my debts and most months I put about $100 (or less) into my savings. I’d like to ramp them both up, but that’d take an income increase 🙂

    1. Lisa, it’s not a terrible thing to be focused on both saving and paying off debt. Nor do I think it’s a bad thing to be focused on saving for a couple of trips. I am obviously still in debt, but I am planning a quick weekend trip to see my BFF over the 4th of July. I’m budgeting for it and yes my debt repayment will be slightly lower that month, but I need to have some semblance of a life while I’m on this journey. It is necessary for my sanity. If I don’t cut myself some slack once in a while, I know I’ll go insane and wind up on a very expensive shopping spree, all on credit, and then end up sighing and giving up. I might be a drama queen too, in case you couldn’t tell 😉

  17. My husband and I recently had to dip into our emergency fund to pay a debt that was seriously weighing us down. Now that it is a debt of the past, we are currently working on putting money back in our savings plan. I don’t think 1000 is enough, but somewhere between three and five months is our goal.

    1. I’m not planning on leaving at $1k forever, I just don’t want to put all my cash into savings while I still have high interest debts looming. Until the debts are paid off I will keep my EF pretty small, but after that I plan to grow it into a fully fledged EF with 6 months or so of expenses.

    1. I’m glad you think so. That is my stance as well. I know that if I don’t have a small EF, I will end up charging things again if there’s an emergency and that’s something I REALLY want to avoid!

  18. I think it’s important to have an emergency fund you’re comfortable with, and that’s different for every situation. We didn’t have a big fund when we were aggressively paying off debt, but in hindsight, we probably should have saved more first. It’ hard when you really decide to get rid of debt to wait a few months to save. I’m glad we didn’t have a huge emergency during that time.

    1. I get what you’re saying Kim and I agree that everyone’s idea of a small EF will be different. What works for one won’t work for another, that’s why it’s “personal” finance. 🙂

  19. It seems like finding a way to do both is ideal. I’m lucky to not have any consumer debt or student loans, so I’m mostly saving for retirement. At a certain point, I dropped my cash down to just $2,500 because it seemed wasteful to have so much collecting dust (or earning .08% in interest).

    1. Check into a different bank. I’m using an online bank (Capital One 360) for part of my savings. They pay much better interest than traditional banks. Something to consider 🙂

  20. I agree that saving has some peace of mind that paying off debt may not bring. I usually try to keep some savings while devoting a small portion to paying off debt. Once I am reasonably comfortable with the amount of savings, I hit debt hard. Both things are really important, but I think you are right to point out it sort of depends on an individual’s situation.

  21. Well, I posted about this recently, and concluded that since, among other reasons, I have some family backup and no home ownership to protect (I would not be homeless or foreclosed on in the event of job loss), I’m comfortable not focusing on an e-fund right now. I’d rather see my remaning 6.8% student loan debt gone. I think in your situation, I would have a small e-fund, fund retirement (which it sounds like you’re doing), and then put everything else towards that high-interest debt, at least for a while. Good luck deciding!

    1. Thanks Cecilia! Yes, I agree with you that not everyone is in the same situation debt or savings-wise and not everyone should focus on the same savings goals. Glad you know what works best for you.

  22. I am of the opinion that the saving is as important as paying off the debit.I completely agree with you about the risk of backfiring of idea of paying the debit quickly.
    Sticking to a plan may definitely work in dealing with the debit and creating an emergency fund.Nice post by the way.

  23. For years, I convinced myself that saving money was more important than paying down my SLs. But years later, I really regretted not focusing on the SLs, because it’s exhilarating when you pay one off, and getting rid of a monthly payment leads to greater financial stability.

    So, now I’m in debt-payoff mode. One SL down, 6 more to go — and hopefully we’ll get rid of the second one this summer. I anticipate sending in $4500 of payments this month, if all goes well. ::crossing my fingers::

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