Saturday, March 22, 2008

Pay Off Debt With Savings - Yes or No?

This is a touchy subject with most financial gurus out there. Some subscribe to the discipline that it is better to have a certain amount in savings (like an emergency fund) and then start paying down debt. Others beleive that you should not agressively save to get to XX amount of dollars to build an emergency fund but instead save a little bit and throw the rest at your debt. I do agree you should have a good amount in an emergency fund before anything else - minimum $1000.00. It just makes good financial sense to not have to go further into debt if something unexpected should rear its ugly head.

But what if youhave a situation like mine: I have the dreadful orthodontist bill with a balance of $1665.00. We have plenty in savings so have no worries about an emergency popping up and not being able to cover it. So why don't I just take some out of savings and pay the balance off to get it over with? Herein lies the caveat. Yes, I could pay off the entire balance from savings but choose not to and here is why: The orthodontist does not charge me a finance charge. When we decided to have my son in braces it would have been advantageous for us to pay for it in full, from savings, becasue we would have gotten a 5% discount for paying the bill up front. Since we opted for monthly payments we are responsible the entire amount (including the 5% which I am assuming is the built in interest). Becasue we elected to have monthly payments there is really no hurry in paying it off faster becasue I am not accruing more interest. The only reason to take the money out of savings and pay it off in full now would be for my piece of mind. I would not have to be sending snowflakes to it or a monthly payment to the bill.

The reason I elect not to take this burden off my mind is two fold -A.) I like looking for snowflakes. It keeps me motivated. It keeps me working towards a goal. If I weren't looking for snowflakes for the ortho bill, I would be doing it for savings, or for the student loan; and B.) I like having money in savings and somehow psychologically, seeing my balance in savings go down by $1665.00 would cause me anxiety. Yes I know it would be for a good cause like paying down debt, but there is just comfort in having a good amount in savings and when your balance takes a hit it almost seems like you are regressing some how. Somehow it seems like you would have to claw and scratch your way back to where you were before before you could breathe again.
I think I will continue paying the bill a little at a time. By doing this I can chip away at the bill and simutaneously be able to save money and watch the savings account balance get bigger.

What would you do?


TC said...

I don't see a lot of comments on your posts, so I wanted to tell you that I am enjoying it and have added you to my feed reader. You aren't just talking to yourself!

I am married with no kids, so I can't relate to some of your issues, but I have embraced the frugal life-style. Thanks for your words of advice!

ChouChou said...

Thank you so much for your support! I have just started this blog so don't have a lot of readers so not many comments but I am glad to hear that I am not talking to myself! I really appreciate your thoughtfulness to take the time to say hello. Please feel free to comment any time. It is truly appreciated.