I just started a new job about 3 months ago. It is a significant pay bump for our family. I made the decision to try to pay off all of our non mortgage debts. We have about $35k in students loans and $16k in a car loan. I chose to cut back significantly on my retirement savings to do so. I was saving 20% of my income, but now I am down to 6% + 3% match in a Roth 401k.
I predict to have $25k paid off by the end of the year. Am I crazy for cutting my savings so much? Am I being too aggressive?
You don’t say how old you are or what the percentage rate is for the loans, so it is hard to judge. But from what you say, you should be able to pay off your loans in 2 years. Then bump your retirement savings back up to 20% and don’t get used to the extra income. Sounds reasonable.
Then yes, sounds like a good plan to me. When you pay off the loans, just put that money in to a retirement plan and don’t get used to having the extra income.
Congrats on the new job and the raise. Always a good idea to grab the company match for savings which you’re doing. And always good to pay off high-interest debt while letting low-interest loans like mortgages ride.
But if you haven’t done so, consider using some of the raise toward building cash reserves, sometimes called an emergency fund. If you take all of your savings and throw it toward debt reduction, if you had a sudden big expense (car repair, leaky roof, medical issue, emergency travel, etc.) you’d likely have to go back to using debt/credit cards to cover it. That leads to more interest payments and delayed payoffs.
Thanks for the advice, we do have emergency savings. But I am not certain how to determine how much we need. It is tough to calculate how much we need. I believe we have about 5 months, but that is just a guess.
A simple rule is to estimate how long it would take you to find a new job if you lost your current one. When people are out of work they tend to run up their credit cards while waiting for the next paycheck.
For me I have at least $50K in a money market online bank currently paying 3.8% interest. I figure I could live on $4K a month for necessities. So I could take up to a year to find a new job without relying on credit cards or loans. If you know your required monthly expenses just multiply by number of months you might be out of work and the total should be your cash reserves.
I think I am on the same page too. I have thought 6 months would be a good buffer. I have a quick and dirty calculation I have used in the past. Your month mortgage or rent x 2 rounded up to the thousand. For me that would be $4k a month or $24k for 6 months. I think I will need to top off our savings.
Now I just need to figure out to save it, all at once or over time.
Keep the motgage as long as you can. You can easily make more than 3% on that money. If you want to put that extra mortgage payment on the higher interest rate debt. Then invest the rest even if it’s a savings account only paying 4-5% which is still a better rate than the mortgage payment. You should have another 3-6 months worth of expenses in a liquid asset of some sort. Use your extra mortgage payments for that. When you have that done then put that extra money on a long term investment in the market. And, do utilize your 401k contribution to the max and then max out your Roth eligibility. Clearing Debt is good, but not at the cost of growing your savings and retirement. Make a plan then work the loan. Many people just increase their standard living when the get raises. There is plenty of time for that once you have your plan under control.
I forgot to mention that if you’re eligible for unemployment insurance if you happened to be laid off, you could count that as part of your emergency fund.
It definitely bothers me to keep a lot of money in a bank account paying around 4-5% when stocks were up 20%+ the last 2 years. Over the last 10 years the S&P 500 averaged 13% per year. But the index went negative in 2018 and 2022 so when that happens we breathe a sigh of relief that we have assets in cash reserves and not 100% in stocks.