When paying off debt: should we build our savings or pay off debt first?

Question

So the bad economy has been a major wake-up call for my husband and I. We were living beyond our means and was saving nothing. He has been laid off twice this year, and is now working again. Should we be saving all that we can for when he is laid off again (almost a guarantee right now) or should we work on paying off our debt?

Answer 1

Debt costs you money -- pay it off!

Answer 2

You should save up an "emergency fund" (3-6 months' living expenses) first, then start paying off the debt.  And don't run up any new debt.

Answer 3

I would suggest the first thing to do is get on a budget, compare your current combined salary to your monthly expenses.  To get started you can download a free budget spreadsheet from: http://www.bankrate.com/brm/news/debt/de... or use an on-line tool at: http://www.kiplinger.com/tools/budget/

With a budget established you will know how much income you have left over after monthly expenses and minimum debt payments to either save and apply to debt.  The other advantage to having a budget established is that you will know what limits to put on your spending to keep it within your income.  This will help you stay away from further debt.

My suggestion is with another layoff possible you split what extra income you have between savings and paying off the debt with the smallest balance.  By doing this you will free up cash which can then be split between saving and paying off the next debt with the smallest balance.

God bless.

Answer 4

I would save up an emergency fund first but then I would start on paying off the debts since I'm sure that the interest rates on the debts are higher than any interest rates you can find in savings accounts.

That's good that you are now working another job and not spending money on going out.  You're going to need to do that for awhile since you were living beyond your means for however many years it's been.

Answer 5

The best option for debt trouble is negotiating your debts with your credit companies to keep the payments from swallowing all of your income. Typically, you have to get a counseling agency to call on your behalf. If you try to work with them yourself, many of them will not cooperate with you because you are not enrolled in credit counseling. Try http://www.womenindebt.info. Good luck!

Answer 6

You want to put your credit cards through the shredder and bring down your debt to manageable level first. You might also  want to put a small amount in the bank with each paycheck as an incentive.

Answer 7

First of all, let me congratulate you and your husband for realizing you need to change your financial habits and for having the courage to make some changes!  

I recommend you have at least $1,000 set aside in an emergency account before you tackle the debt.  Once you have reached that goal, then start paying off all your non-mortgage debt as quickly as possible.

Double up on your payments on your lowest balances.  Once those accounts are paid off, allocate the amount you were paying toward those accounts toward your other accounts, always tackling the lowest balance accounts first.  This is called "snow-balling your debt" and it will keep you on a roll to pay off all your non-mortgage debt.

Once you have paid off all the credit card and installment debt (such as car loans, unsecured or signature loans, student loans, etc.) then start beefing up your emergency fund to include 3-6 months of living expenses.  If you try to do that first, you aren't going to get your debt paid off.

Best wishes to you for a successful financial future.  You have taken the first most important step - realization that you needed to do somethings differently.  Now, go for it!

Answer 8

keep paying off you debt.  paying more then the min payment each month.  you should also try to put some away each pay day.  pay yourself first as it is a bill whether it be $5 or 10 dollars.  you need a cushion for these bad times.  stop putting more on your credit card. cut them up all but one for emergency.  hope this helps.  good luck