Nate and Danielle discuss a listener question about saving or paying down debt while looking to add to the size of a family. They also look at paying down credit cards and the best ways to do it.
Listener question #1:
My husband and I have our mortgage and then we have my husbands student loan which is about $19,000. As of July we have a car payment again since I got in a car accident and we were in need of a new car earlier than we thought which is $15,000. My husband always likes to have $10,000 in our emergency fund since we own a house. We are about to be back up to our emergency fund but now my question is, should we try to pay off both of the loans as fast as we can instead of saving more since we are planning to wanting to start a family next year.
Also my husband would like to know if he should increase what he pays in his Roth or 401 (K) or should we pay more in our debt?
Thanks for the question. We would agree with leaving your emergency fund intact. You are not in any type of situation where it would be necessary to use it. As for starting a family, we would not start the savings process for that until that process is confirmed. Once pregnant, you have 9-10 months to work on your savings. For us, we would prefer to pay down debt until that happens. It took us over 2 years to get pregnant, and if we put money into our savings for that long, we probably would’ve spent it on something unnecessary to distract us from the frustration and pain that the delay in pregnancy took for us.
As far as the debt/retirement question we would at a minimum make sure that we got a match from our workplace. After we did that we would try to figure out what percentage we could could afford to do. By that we mean that we would look at the interest rate on our car or student loan vs what we could get in the stock market.
For example if we had a zero percent loan on our car, it makes no sense to pay it down quicker. But if we had a 7% interest rate on one of the loans, we would pay that down instead of putting more into retirement. If we were planning on starting a family soon, we would opt to pay off our debt (minus super-low interest rates) before investing. Just having more usable money would be desirable. Depending on your income, those loans could really go away quickly if you focus on them.
Listener question #2:
My goal for 2020 is to be in charge of mine and my boyfriends finances. We have goals for the future that all include being financially prepared. We want to get married, buy a house and start a family in the future. We currently are renting. I have a few small credit cards and one GIANT credit card. My boyfriend has several small credit cards. We each have auto loans. So, my question for you is how do I pay off my giant credit card loan?! I have had this card for about 5-6 years and as time went on the availability went up and so did my charges. In order for me to feel like I have my finances in check, I need this card paid off. The balance is about $5,500. The minimum payment is $120. What advice do you have for me to pay this card off!
Awesome 2020 goal. Paying off credit cards is all about having your budget in order, and taking any extra money and throwing it at debt to pay it off as fast as possible. If you don’t already, create a budget and identify all of your needed and unneeded expenses. Needed expenses are your mortgage/rent, utilities, food, etc. Once you have all of those items identified, locate places that you spend money that you don’t have to: going out to eat, movies, unused subscriptions, etc. Basically you want to get an idea of where your money is going. Total everything up. Then compare it to your monthly income. Find out how much you have extra each month and how much more extra you could have if you eliminated your unneeded expenses.
I know it’s easy to focus on the biggest credit card, but also take a look at interest rates and really small credit card bills. Try getting rid of the card with the highest interest rate first, even if it’s not the biggest amount. Also if you have a card with just a few hundred on it, get rid of that one right away and cancel. It may help you feel more in control and help you gain momentum if you tackle some of the smaller ones.
Remember that once you pay it off, you don’t want to be in this situation again. Don’t put things on a credit card that you cannot immediately pay for with money for your bank account. This helps you stay honest and live within what you can afford.