Should I pay off all my debt in one fell swoop?
June 2, 2015 11:40 AM   Subscribe

I have an emergency savings fund with at least 6 months of living expenses. It's almost exactly the same amount as my total debt (credit cards and student loans). I am really tempted to just get rid of it all in one fell swoop, but I'm not sure this is a good idea. I have a steady income and fairly predictable expenses (though anything could happen). No kids, spouse or house.

Credit card #1 has $1600 left at 4.5% interest. This is from a 2010 settlement and the minimum is a fixed $400/month. The account will be closed when it's paid off.
Credit card #2 has $1800 left at 0% interest (balance transfer) until next April, when it goes up to 22%. The minimum payment is $25/month. I have two other credit cards with 0 balances. I use one for the rewards and pay it off every month.
Student loans are around $7600 at 4.5% interest. The minimum payment is $77.

I can easily make the minimums and I realize that the interest isn't costing me too much (I used to have a cc with 27.99% APR!!) but being debt free is incredibly emotionally enticing. This is my main reason for wanting to pay it off.

If I didn't have the debt payments, I could easily save 25% of my monthly income, and up to 40% without too much stretching. I am good at budgeting; the credit card debt is from less responsible times. I have faith that I can rebuild the emergency fund quickly and that would be my highest priority.

A wrinkle: for Reasons involving the aforementioned less responsible times, I do not have a retirement account. I am 40. I do want to set this up but I want the debt paid off first.

So, am I being impulsive or is this a good idea?
posted by desjardins to Work & Money (35 answers total) 6 users marked this as a favorite
 
Pay off the credit cards and one half student loan. Build it up again. Pay remainder of student loan.
posted by asockpuppet at 11:46 AM on June 2, 2015 [15 favorites]


I would pay off the credit card debt to give myself peace of mind, and apply the monthly payments on those towards establishing a retirement account. I would keep the remainder as a cushion.
posted by larthegreat at 11:47 AM on June 2, 2015 [8 favorites]


Being debt free is incredibly emotionally enticing. This is my main reason for wanting to pay it off.

And this should not be deminished; that feeling totally is worth a price tag, but completely obliterating your savings isn't probably the best way to do it.

Personally, I would go the debt repayment snowball method, because you can jumpstart it and make a huge dent in it: Use a chunk of your savings sum to pay off CC#1, then take your monthly payment there and apply it to CC#2 (and try to pay it off before April, otherwise you pay that shit off first). Then, eventually shift that same monthly payment towards your student debt. Personally, I'd ignore the student debt until later on; that's a fairly low interest rate, and that should take a backseat to retirement funds.
posted by furnace.heart at 11:48 AM on June 2, 2015 [8 favorites]


Just a few thought exercises to consider:

If you didn't have debt payments, how long would it take for 25-30% of your monthly income to bring you back up to your current emergency fund level? Six months? A year? Two years? Is that interstitial time going to increase your anxiety?

Does your job offer short term and long term disability insurance, and do you avail yourself of those?

What is your appetite for risk? If you paid off all your debt with all your savings today, and got maimed by a lion tomorrow, would you still feel satisfied that you had zero debt for a day, knowing you'd have to go into debt again in the short or medium term?
posted by juniperesque at 11:49 AM on June 2, 2015 [5 favorites]


Having a little cash security is worth waiting a bit, and your interest rates are low. A middle path seems appropriate - so you have a little bit of both. Even though 4.5% is pretty low, I would pay off CC #1 for that feeling of accomplishment. Your minimum payment there is so high anyway that it would have been paid off quickly. Keep CC 2 going at the minimum until next April, then pay off. Keep student loan going as normal - maybe pay a bit more than the minimum, $100-$150. Keep saving.
posted by decathexis at 11:50 AM on June 2, 2015 [1 favorite]


I do want to set this up but I want the debt paid off first.

Why? Pay the debt and pay your retirement at the same time, and in large part this is about getting into the habit of paying into a 401K or IRA etc. on a regular basis. I am also no fan of paying off a debt early if it leaves you with no safety cushion. There is a lot of advice which tries to take the most efficient economic track of attending to high interest rates first etc. but assumes you will tackle this with computer like efficiency and lack of emotion and spending outside of your carefully planned budget. Like a diet, anything too strict becomes difficult to stick with. Moderation in all things. I would allocate some to debt reduction, some to savings and some to retirement.
posted by caddis at 11:50 AM on June 2, 2015 [3 favorites]


zomg, I am a few weeks out from doing this myself minus the house thing... :shivers, twitches:

We can discuss more over adult beverages at the time and date of your choosing but my first impulse is to shriek, "Yes! Let us gather merrily and rejoice in a debt-free wonderland!" Just thinking of how that first night's sleep will be when the debt is gone has me on tenterhooks.

If you paid off all your debt with all your savings today, and got maimed by a lion tomorrow, would you still feel satisfied that you had zero debt for a day, knowing you'd have to go into debt again in the short or medium term?

This was the key for me; I've been heavily in debt for literally my whole life so my answer was and is HELL YES.
posted by divined by radio at 11:50 AM on June 2, 2015 [5 favorites]


As long as you suspect you'll have a steady income and be able to rebuild your rainy day fund, I would pay it all off and buy a bottle of something good to celebrate being debt free.

If the worst happens and you have emergency expenses, you can put it on your credit cards and you're not much worse off other than maybe having more interest to pay off.

Once it's paid off, set a goal to save as much as possible, including in a retirement fund.

It's good to be debt free.

Also, from what I understand this isn't all that much debt for your average 40 year old. You should already be proud or yourself.
posted by bondcliff at 11:53 AM on June 2, 2015 [2 favorites]


You could pay off the credit card with interest and the student loan, and keep making monthly payments on the 0% card, so you don't completely wipe out your cash. Then put the amount that you were paying toward the credit card and student loan into your emergency fund (half) and retirement (other half) -- T Rowe Price has a Roth IRA which does not have a minimum investment when you set up automatic monthly contributions, so it's a good way to start from nothing.
posted by rabbitrabbit at 11:53 AM on June 2, 2015


I would take a middle road, pay off cc#1, and half the student loan. Pay the minimum on your cc#2 while you build up your emergency fund again and then plan to pay it off entirely just before the APR goes up. Set up a retirement account and try to put as much as possible into this. Possibly also increase your student loan payment. I won't diminish the psychological benefit to having the weight of debt removed, but at the same time it may make more sense financially to be earning money on your retirement investments even while carrying some student loan debt.
posted by JenMarie at 12:00 PM on June 2, 2015 [4 favorites]


Pay off Credit Cards 1 and 2. Put their payments directly into Student Loan (i.e., make your student loan default $425, not $77.)

Save the $77 you were paying towards Student Loan and anything else you can to build up your savings again. When it reaches six months' equivalent again, pay off the rest of Student Loan.

Use the $425+$77 to build your emergency fund back up to six months' worth again, and consider making it a year's worth. At that point, ask another question about what to do with all your money :)
posted by blnkfrnk at 12:03 PM on June 2, 2015 [3 favorites]


If you have debt, your savings are null and void.

Well, not necessarily. Debt isn't due all at once, and some things require immediate cash on-hand. If you have no credit and you have debt, then savings are essential. If you have credit card debt and still can use that credit, then carrying a balance while you have savings that could cancel that debt is just costing you money to hoard cash.

There is definitely a middle of the road strategy that can give you the peace of mind of less debt but some liquid cash.
posted by xingcat at 12:11 PM on June 2, 2015 [2 favorites]


1. Keep 3 months of reserve
2. Pay off the highest interest loans first.
3. Keep knocking off the debts until you have no debt left.
4. Build back to 6 months.


By having less and less debt you can snowball paying off the remaining depth.

Always have savings! The moment you don't "S9*&6T" will hit the fan....
posted by Mac-Expert at 12:12 PM on June 2, 2015


Pay off the debt that carries interest (credit card number one and the student loan). Just pay the minimum on credit card number two until the 0% interest expires. This leaves you with one month of emergency fund, but you will still have access to credit through your cards if you need it in an emergency. You should be able to build up your emergency fund quite quickly again once you are no longer paying $477 per month for these debts.

Obviously, it would be far less than ideal to have to use credit again, but it is better to possibly have to use your credit on the small chance that you need it, rather than pay interest in order to keep money sitting around in case you need it. It really doesn't make financial sense to have debt in order to maintain an emergency fund (so that you can avoid possibly having to take on some future debt if things go poorly). If you fear you wouldn't have access to credit in an emergency, then a fund makes sense, but it doesn't look like this is the case here.
posted by ssg at 12:21 PM on June 2, 2015 [2 favorites]


I would not deplete your emergency fund below 3 months. Pay off CC1 as quickly as you can, pay off CC2 by March/April but no faster than necessary, as things get paid off put those payments towards paying off your student loan, rebuilding the emergency fund, then towards a retirement fund.
posted by epo at 12:22 PM on June 2, 2015


I'd do it because it would feel awesome, and throw all your extra money into rebuilding the emergency fund afterward. Sometimes a tiny bit of risk is worth the reward.
posted by metasarah at 12:23 PM on June 2, 2015


Nuke the debt from orbit. It's the only way to be sure.

Sure, you could play games with interest rates. Are you earning more than 4.5% on your savings? Then it's worth it to pay the minimum on everything, then pay off CC#2 next March. Are you likely to go back to school in the next few years at least half time? Then it's worth it to keep the student loans (assuming they'd go back into deferment). And you can start a retirement fund now, put in some nominal amount per week.

The alternative is wiping out all your debt RIGHT NOW, and then building up your savings. Take the money you're currently paying on your debt and immediately start saving that (minimum $502/month = $6000/year).

I know which one of these would leave me feeling SO. MUCH. FREER.
posted by disconnect at 12:27 PM on June 2, 2015 [1 favorite]


This is assuming that as of right now, your nest egg is around $11,000:

-- Pay off CC#1, so that you never have to think about it again.

-- Don't pay off CC#2, just make sure you keep $1,800 on hand for when you want to pay it. Given that you're not paying interest on the card, more liquidity is better than less liquidity, so it's better to keep that $1,800 in cash.

-- Personally, I'd pay off about $4,600 of the student loan (leaving about $3,000). Mostly because I wouldn't want my nest egg to dip too far below $5,000. Everyone has a different threshold for how large a cash nest egg they need in order to feel secure/comfortable, so YMMV, but ~$5,000 is mine. I definitely would try to keep the nest egg above $3,000 at the lowest.

Please DO NOT throw your entire nest egg into debt repayment. I have done that, and ime it's more stressful to have very little access to cash and low/no debt than it is to have good access to cash but higher debt. Credit is great, but it isn't anywhere as useful as cash. You can't pay rent with credit, you can't put money down on a car with it, and lots of other small-but-necessary expenses (like the quarters you need for the laundry machine) are cash-only. Credit cards can't entirely replace a cash emergency fund.
posted by rue72 at 12:34 PM on June 2, 2015 [9 favorites]


Agree with pay off the interest bearing debt and put the savings from the payments into retirement account.

One of the biggest hurdles to saving for retirement is just starting the process because people get overwhelmed by the idea of starting an account and what to invest in. Getting it set up will be a major step forward. There are Roth IRA options with account minimums as low as $100. There is no reason to wait until you are completely debt free to do so, particularly making payments on a 0% interest debt that you're going to be able to afford to pay off to do so.
posted by treehorn+bunny at 12:39 PM on June 2, 2015


Keep the 0% interest debt, pay off CC#1. Keep making tiny student loan payments on schedule.

0% interest is known as "free money" in the lending world. You borrowed it at the value of yesterday's dollar and are paying it off in the diminished value of tomorrow's dollar all while enjoying the use of it today.

After you pay off CC#1, as the other folks have suggested, maybe keep putting that same amount of your income back into a savings account to build back up your savings.
posted by ben242 at 12:42 PM on June 2, 2015


My approach would be to make a semi-short term goal of becoming debt-free: let's say, by Jan. 1 2016. I'd use a little of the emergency savings to pay off CC#1, use that 400$/month and any extra at the end of the month, with light belt-tightening, for the student loans. Whatever was left at the end of the year, I'd pay off in full.

Advantages: keeps some money to hand, has a clearly defined end-point for stricter budgeting, it feels almost as good putting in a triple payment as it does just paying something off, everything is done before CC#2's interest rate goes up, and only 6 months to debt freedom and retirement savings.
posted by tchemgrrl at 12:43 PM on June 2, 2015


Please DO NOT throw your entire nest egg into debt repayment. I have done that, and ime it's more stressful to have very little access to cash and low/no debt than it is to have good access to cash but higher debt. Credit is great, but it isn't anywhere as useful as cash.

Yeah, the two stresses are kind of at war with one another. Having no debt is incredibly amazing. Having no safety net is awful, awful, awful, awful. I would make a plan and execute your plan so you can balance the best of both worlds--eventually no debt and adequate safety over a longer timespan. If you watch your debt significantly and predictably drop each month, and you have a monthly countdown that you tick off each month to zero, then you can get some pre-amazingness with less of the downsides.
posted by zeek321 at 12:50 PM on June 2, 2015


Whatever you decide, you should probably set up a retirement account like yesterday, particularly if you have 401k matching (ie, free money). If you don't have matching, you should at least consider the tax savings as a benefit.

From there you can decide what to do - you can, for example, start to pay your debt from your savings, while still putting into retirement.

I personally would probably do this:
1) pay off CC 1
2) put 10% of income into retirement
3) put 15% of income into debt repayments
4) re-evaluate in 6 months with the aim to paying off the 0% card that is going to convert to high interest in April
posted by vunder at 1:39 PM on June 2, 2015


...but being debt free is incredibly emotionally enticing. This is my main reason for wanting to pay it off.

At least pay off your interest bearing loans. A 4.5% carrying cost is a pretty high relative to current returns on much investment.
posted by bonehead at 1:51 PM on June 2, 2015


Here's how I would proceed in your shoes:

Definitely pay off CC #1. The sooner that's closed, the sooner it will stop dragging your credit rating down as a settlement account.

Since CC #2 is at 0% interest until next April, continue making at least the minimum payment, while saving up to pay it off before next April. (22%? Ouch.)

Figure out a minimum amount you're comfortable having in savings. Now add about $1,000 to that amount. Subtract the payoff for CC #1 plus that amount from the amount in your savings. Use this number to find out how much to throw at your student loan.

Throw as much extra money as possible CC #2 as you earn it, while adding a comfortable amount to savings each month. As soon as CC #2 is paid off, throw the money at the student loan.

(I wish MY current debt situation were even HALF this tractable. Alas, it is not.)
posted by tckma at 1:52 PM on June 2, 2015


I do want to set this up but I want the debt paid off first.

Don't. That is anxiety talking. Pay off CC which has interest associated with it, wait on one that is 0% for now. Realistically you could probably flip that to another 0% CC with minimal fees when that one expires but.... eh. Let your savings build up again, pay down other CC once it has interest associated with it. Your retirement account in today's market will probably make more than 4.5% So it's not rational to not start socking money away there. Get a retirement account like yesterday. Having a debt-free date will be a useful motivator and I'd try to make yourself more comfortable with having that date in the near future but it doesn't have to be today. It's really important to have savings for emergencies otherwise you put emergencies on CCs and wind up right back here.
posted by jessamyn at 1:55 PM on June 2, 2015


Dave Ramsey (syndicated radio host on financial matters) suggests keeping $1,000 as an emergency fund, then using the aforementioned debt snowball to pay off all debts, then saving up 6-12 months worth of funds.

In other words - if you used all of your savings to pay off all of your debt tomorrow, then the next day your car broke down, what would you do? Keep a bit just in case.
posted by tacodave at 2:59 PM on June 2, 2015


Yes, pay everything off. Before you do, though, call the different creditors and ask them if they offer a discount on what is owed if paying in full. Negotiate. And then put away all cards and start building a retirement fund. Go on a spending diet for the next few months and put more in the fund than you think you should. Sometimes being debt free can make us a bit giddy and a little sloppy with our spending. By committing to not spending for the next 3 or 4 months, you give yourself time to adjust to your new circumstances.
posted by myselfasme at 3:49 PM on June 2, 2015


I have just finished doing this (putting windfall into paying off all debt) and it feels GREAT. I'm also now feeling chintzier than I ever have, maybe from dread of getting into debt again. It's when the numbers start piling up that I tended to think "what the hell, why not?" and charged one more thing. It was particularly satisfying to tell those thieves at SallieMae/Navient goodbye.
posted by mmiddle at 4:26 PM on June 2, 2015


I'm too risk averse to wipe out the emergency fund to get rid of the debt (though my emergency fund recently passed the amount due on my car and the thought crossed my mind...). I'd go ahead and kill off Credit Card #1 because it'll free up $400/month which is a good chunk of change and you've been dealing with it for five years, so that'll be a win. You need to pay $180/month to Credit Card #2 to be done in April, which is an extra $155/month over the $25 you're paying now. That leaves $245/month. The "obvious" choices are to split it either $200-$45 or $122.50-$122.50 between retirement and the student loan, with the order and split depending on your priorities. Cap off your emergency fund at ~6 months expenses (or where it is now, if you're over that) and split whatever that frees up each month between the student loan and retirement fund.
posted by hoyland at 6:06 PM on June 2, 2015


I'm on Team PayOffTheDebt, with a few caveats.

Obviously, it would be far less than ideal to have to use credit again, but it is better to possibly have to use your credit on the small chance that you need it, rather than pay interest in order to keep money sitting around in case you need it. It really doesn't make financial sense to have debt in order to maintain an emergency fund (so that you can avoid possibly having to take on some future debt if things go poorly).

This is why I am pro nuking the debt from orbit -- you are currently paying steep (but not usurious) interest rates on debt in order to keep cash in the bank. This is expensive and doesn't make much sense.

The order I would approach this in is:

1) Keep $1000 in cash in case of small emergencies (it's good to have the credit cards, but even better to not use them).
2) Set up a retirement account with a modest automatic contribution monthly.
3) Pay off the debt. Contrary to a lot of advice above, I'd say get rid of both credit cards first (because even at 0% interest, you are only one missed payment due to a bank mistake from having the interest rate jacked up or fees added on, wiping out any ) and then roll the rest into the student loans.
4) Rebuild your emergency fund (while being careful to not run any credit card balances).
5) Once that is in place, up your retirement contributions (and I would argue also spending money on experiences that are enjoyable now, since life is uncertain and not everyone lives to be 100).
posted by Dip Flash at 7:53 PM on June 2, 2015


I'm not an economist, I don't know exactly how best to express this, but - there is value in having a comfy pile of money in savings. It is often difficult to save such a sum. I understand the lure of wanting to be debt free - but you are in the enviable position where you could put a little thought and time into it and end up debt-free and with a nice rainy-day fund.

Long story short: figure out a schedule to pay off your debt within (say) a year. You might want to put up to 1/3 of your savings into the effort - but keep some cash available, Just In Case.
posted by doctor tough love at 9:13 PM on June 2, 2015


being debt free is incredibly emotionally enticing

Pay off everything and then start saving at least as much as you were paying on your debts very month. More, if you can. You'll be much happier watching the savings (retirement, etc.) accounts grow each month. And stop using the remaining credit card unless it's just a matter of convenience and you intend to pay off the whole balance when you make the next payment.

For a brief time, you'll be in the precarious position of having no savings, but you can always get a cash advance on your credit card in an emergency. (But only in an emergency. Otherwise, forget it.)
posted by pracowity at 11:44 AM on June 3, 2015 [1 favorite]


I agree with pracowity above.

We did exactly what you're describing (paid off all debt in one fell swoop once we had enough savings), and then started rebuilding our emergency fund with all the debt minimum payments, and it felt AMAZING.

2 years later, we have a huge emergency fund, zero debt, and feel free free FREE.
posted by raspberrE at 8:36 AM on June 4, 2015 [1 favorite]


Well, I can't math good, so when I redid the numbers it turned out there would be a $100 shortfall if I paid off all three debts right now. So I paid off the two interest-having accounts and I'll pay off the 0% interest card before the interest goes up in April. I'm going to put the money I would have used for payments into a 401K and in a terrible emergency (e.g. lion maiming) I can take out a loan from it.

Thanks everyone! I feel great!
posted by desjardins at 10:16 AM on June 4, 2015 [3 favorites]


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