Paying Off Debt vs. Protecting Your Family From Hardship

A Penny Saved is a Penny Earned.

Benjamin Franklin

The question that I have had all along in my financial recovery is whether it is better to payoff debt first, or to grow your savings etc.

Dave Ramsey is famous for putting $1,000 in an emergency fund and then going hard after all of your debt besides your home. This combines the two together and is a very effective method. However, with a substantial Student Loan to payoff would that be too long of a time to keep my family unprotected. This is not an easy decision, but it is one that I am going to have to make by the end of the month.

We currently have $1,000 in an emergency fund and our program suggests to also have 3-6 months of living expenses in savings, along with proper insurance. The insurance is no problem right now, as that is covered through my work, so we are left with do we start paying extra on debt, or do we save 3-6 months? That would equal to $15,000 – $30,000 in savings.

If I choose to go the debt route, then I am to use the snowball system of paying off the least expensive balance first, while paying the minimum on everything else. Once the first is payed off then you use that money on the next highest balance etc. I have also read somewhere that paying an extra $150 a month to the least debt is sort of the sweet spot to accelerate the debt snowball. There are also other versions, such as paying off the highest interest debt etc.

For us that would mean starting with the 2nd mortgage of $45,000 and then moving to the Student Loan of $150,000 and then we would be left with the home at $265,000. That is a great deal of time to pay these large amounts off and I wonder if we can treat them all as if they were just 1 large house payment and start with savings. Not an easy decision.

I think what I will do is to pay an extra $100 – $150 a month on the 2nd mortgage and then if I get anything extra, like a bonus check or something, to put it into savings. The real trouble is if there is an emergency I do not want to put anything onto the credit card. I need to stop that practice all together. Interestingly, our air conditioner and furnace may be going out, so this might test our mettle already. I think we can make it another year, but it might be a good idea to save for it now. Further, Christmas is always at the same time every year and we would also like to go on a vacation, though it can be a staycation. These are all expenses that need to be thought about and planned for. These are not easy decisions and we will see if I need to adjust my plan as the time goes along.

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