The Empowered Dollar had an enviable problem. She had enough cushion in savings for repayment of student loans.
In the end, she decided to split the difference between paying off her student loans and depleting her savings. She “couldn’t bear to part with all” of her savings.
For my two cents this was a very wise move. She solicited a lot of advice and considered it carefully. (I didn't give advice the first time around.) She didn't act hastily. And although there are times to go “all in” those times are the exception rather than the rule. “Go big or go home” works for some people, but I'm not convinced it works for the majority of people.
A few years ago Suze Orman made the case for a larger emergency fund. I don't think our economy is out of the woods yet, so this is still good advice. Having more cushion is better than having less cushion when jobs are uncertain. Sure, the faster you lower debt, the less interest you pay, but paying less interest is just one side of the equation. If you're debt-free but cash-poor, an unforeseen expense will put you right back in debt again.
What level of savings is comfortable enough?
It's probably less that 75 years' worth of living expenses, I'll admit, but there is a number that will let you sleep better at night. Maybe not perfectly, but better.
With our recent wake-up call with our finances, I suggested to my wife that we concentrate on building up our checking account to a certain level before paying down our other debts. We're managing the pay-down of our debts (van loan, investment property mortgage, primary mortgage) and actually paying a little more than the minimum on each. Once we see our checking account balance stay above some threshold (equivalent to about a month's worth of my take-home pay) then we'll call that “good enough” and pay down the other debts faster.
We have toyed with the idea of liquidating investments to pay off the van and the investment property, but the balances on those loans are still a bit high. The mortgage rate is favorable, as is the van loan. Once the balances get lower, there is more reason to just pay the things off, but not quite yet.
All in all, building up a reasonable emergency fund first is a good “just-right” approach to hedging against financial problems.
Even with debt in the picture.
I thought it was a great move too, and it gives her the opportunity to see how she feels about both. If she builds up more money in the next 6-12 months, how she feels about her decision today can guide her to either paying the loan off once and for all or to direct that toward additional savings goals.
There is a lot of advice out there, I am convinced there is no perfect number. I have savings and more importantly access to cash if I need it. I downsized, no children at home and my wife and I have very stable careers (RN & teacher).
Larry’s right, there is a lot of advice out there! To me, it comes down to a gut test — I put different scenarios out there, and ask my gut how it feels. If it’s uneasy, then I know.
Right. I guess my gut and her gut are like-minded, though. 🙂
I think when you get into the right mindset, you want it all. No debt and lots of money, yesterday. It’s hard to be patient and have setbacks. I do think you need enough in liquid savings to cover expenses for what makes you comfortable. There is certainly no magic number.