Last week I talked about the need for my wife and I to decide on a new savings goal. We had been saving ten percent of our paychecks each month in the Joint Savings Account, which allowed us to do some fun things and avoid credit cards, but wasn’t really a place for money to grow. We had to keep the goal at ten percent because I was focused on eliminating my credit card debt. Now I’ve done that, so it was time to re-examine our options.
I made a copy of our Household Budget spreadsheet and started playing around with the percentage number. Ten percent wasn’t getting us anywhere, and fifty percent wouldn’t leave any room even for buying new clothes. We eventually settled on twenty-five percent, which we’ll try for a few months and change later if we need to. At twenty-five percent, we’ll be saving $1,217 a month between the two of us, which will give us a one-month emergency fund in four months, and a three-month buffer in eleven months. I doubt we’re going to make it a full four months of saving before we decide finally to get a professional to come trim these trees or fix some other part of the house, and that doesn’t worry me. As long as we’re not spending frivolously, and especially as long as we’re not creating new debt, then we’re on the right track.
The twenty-five percent goal also means something else: even if I increase my weekly personal spending to $180, which isn’t hard to do if I want to have regular haircuts and keep taking improv classes, I’ll still have $1,000 a month left over. I read through the comments on last week’s update, and I took another look at Dave Ramsey’s Drive Free, Retire Rich video, and I think I’m coming around to the idea of making extra principal payments on my car loan.
If I directed the entire $1,000 every month toward the principal on the car loan, the payments would stop fourteen months early, I would save over $1,300 on the loan, and of course we would reduce our joint monthly expenses by $575 (I’m working with a 10.15% interest rate… pathetic, I know), which would enable us to save even faster.
Am I overlooking any other, smarter ideas?
Published or updated August 1, 2010.
{ 9 comments… read them below or add one }
With a 10% interest rate, I would put every dollar that I can toward paying that off. That includes any non-matched retirement contributions. There’s no way you’ll be getting returns like that in equities without a huge amount of risk, and you’re much better off getting out of debt since the rate is guaranteed and you don’t risk any losing any capital.
Congrats on paying off your credit card debt. Seems like you have the right idea, focusing on paying off the car loan ASAP!
I would build the efund before putting extra to the car. What if there’s job loss or other major expense before the car is paid off?
Why not refi the car loan? You should be able to get it to ~6% if you have good credit. Then you can pay it off faster in addition to paying less interest.
I would typically refi the car loan to between 3-6% and invest your excess funds; however, if you’re talking about your 2004 Civic, you may be out of luck. Most banks won’t touch anything older than 2005. Pay that baby off !
Just kidding, you’re not flexo
Why is it all or none? Why not pay a little bit extra on the principal and save some?
that is very impressive, with my budget I am trying to pay off a loan and credit card debt so I can focus on other goals.
If I could not refi the loan to a lower interest rate then I wold attack that debt above all else.
If I can refi then I would split the difference between savings and paying off the debt, 75% debt, 25% savings until the car was paid off. Then I would take half the amount I was paying on my car loan and put it into a car account for repairs, maintenance and future car costs, including a “new” needed car in the future. That way I have a specific account for car expenses and I am saving for the next prchase without impacting my budget in the future.