When I mentioned in my last post that I had set savings benchmarks for myself for 2010, I thought for sure that someone would ask why I didn’t decide to go the debt payoff route with the money I’ll be receiving from my (retroactive!) raise. Then I realized that given the severity of my financial ADD, all my PF pals probably figured I’d forgotten about that already 🙂 Since I calculated about two weeks ago that I could be debt free within three and a half years, I’ve been doing some serious thinking about whether I should be focusing on debt payoff or saving (you’ve heard that one before!). And I’ve decided that I’ll be focusing on savings for the foreseeable future. I actually made this decision a while ago, but I wanted to be sure the decision would stick before I wrote about it. The reasons for this decision are:
1. Each of my current debts have an interest rate of below 10%
According to most financial experts, any debt that carries an interest rate of over 10% is “toxic.” While I don’t believe in the concept of “good” and “bad” debt, I do think that some debts are more “harmful” than others to your financial future. Since the highest interest rate debt I have right now is my car loan (which is at 7%), I’m not too worried.
2. I’m not adding any new debt
Basically, every month I’m reducing my debt substantially because I’m not adding any new debt to my overall load of liabilities. Therefore, I’m actually making progress (albeit slow progress) towards becoming debt free every month anyway, without adding extra payments.
3. My current savings are frighteningly low
$1000 in my Freedom Fund is the absolute minimum I think is acceptable to keep liquid in case of an emergency. I feel very vulnerable right now, and having extra cash on hand would help me sleep better at night.
4. I feel that saving (rather than debt payoff) will give me the most options in the future
Admittedly, paying of debt does give you a very “I’m free!” feeling. However, I actually think that having a healthy savings account allows you more flexibility. An example: let’s say you have to move into a new apartment. You’ll need first and last month’s rent, plus a security deposit. Being debt free won’t help you in this situation, but having some savings will. Of course, I’m sure that there are other examples of real-life scenarios where being totally debt free would be more helpful, but for me this is the most likely circumstance that would happen in the near future, and I want to be ready!
5. It’s not realistic that I’ll ever be completely debt free
The truth is, I don’t make a big salary and I never will. My student loans will be paid off someday and so will my T.V. But if I’m being realistic with myself, it’s extremely unlikely that I will ever go more than two years without a car payment. Why? Saving for retirement and a house are more important to me than saving for a car. It’s not reasonable for me to expect myself to be paying for a car outright anytime soon, and I’m ok with that. However, I do think it would be really discouraging for me to make a commitment to paying off all my debts, only to have to take out a whole new car loan because my car dies. Maybe I’m using faulty logic, but I think that PF is all about setting priorities. Avoiding car payments for the rest of my life is not one of my priorities.
So what do you think about my reasoning? And should we take bets on when I change my mind again? 🙂