"Good" debt vs. savings

[crunchy_mommy]

DH & I have a mortgage & school (federal) loans, which I always hear is "good" debt due to low interest rates, tax deductions, ability to defer, etc. (we don't have any other debt). We have been trying to save up a certain amount of money for emergency and have pretty much reached that goal. So my question is, are we better off continuing to add to the emergency fund, or should we pay off some of our "good" debt? There are other options too I suppose (like treat ourselves a bit & stop living on such a tight budget, but that doesn't much appeal to me right now.) We also have half our house torn apart and it would be nice to finish it but we definitely don't have enough to pay someone else & we don't have the time to do it ourselves. How much money would you want to have in your emergency fund before paying off "good" debt? Would you ever pay extra on "good" debt, or would you put the extra $$ in savings, college fund, retirement fund, etc?

[kereplussome]

I tend to follow Dave Ramsey's baby steps. Step 1. $1000 in emergency fund.
2. Pay off all debt using the debt snowball 3. 3-6 mo. emergency funds 4. 15% of household income to pre-tax retirement funding 5. College funding
6.Pay off home early 7. Build wealth and give
To find more detailed info go to: http://www.daveramsey.com/new/baby-steps/

[SeekingJoy]

What is the interest rate of your mortgage and student loan debt? For me, the rate matters along with the type of debt.

[Delicateflower]

It all comes down to what rate you're paying and what you're earning.

[Shellie]

I follow Dave but I tend to lump student loans in with mortgage, in that stage He puts them in stage 2). At least for us, they are nearly mortgage-sized. Dh and I have not decided which to pay off first and we're going to pay them off with what's left after maxing out 401k contributions (of course this won't start till next year cause we have one car and one card left!) once we have a full 6 months expenses (not income) saved.

I think interest rate matters in that decision--our mortgage is 5% and student loans are 7% (I don't know why since I know so many people with 2-3%).

[blissful_maia]

Originally Posted by Delicateflower

It all comes down to what rate you're paying and what you're earning.

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[cschick]

Originally Posted by Delicateflower

It all comes down to what rate you're paying and what you're earning.

This. With my student loans consolidated at 2.8% . . . they are getting paid as they are required to be paid. The mortgage is a lot more useful (at 5%) to be putting any extra money toward (we don't have any other debt).

[crunchy_mommy]

The school loan payments total a little less than 5% of our pre-tax income. The mortgage is a little over 25% of our pre-tax income, but that includes taxes & home insurance.

Mine have low interest (around 2%) and DH's (which are almost triple my total loan amounts) are 5-6%. Our mortgage is 5.5%.

The emergency fund we have saved up is equal to about 3 1/2 months gross income but closer to 8-9 months of basic expenses.

I love the idea of having no/almost no debt but I definitely like the security of having a large emergency fund. The interest rate on our savings account used to be almost as high as the mortgage rate, making it (mentally) easier to keep saving, but now it's sunk to 1-2%.

[SeekingJoy]

If you aren't already maxing out whatever matched retirement savings you have access to (401k, 403b, etc), that would be my next step. Then contribute to a ROTH for each of you, then pay off your DH's student loans, then other debt.

[Ola_]

I agree with retirement savings - if you aren't contributing already, I'd defintiely do that. If you are, I'd see about increasing the amount a little. You don't have to put away a lot each month but it will accumulate and gain interest.

[crunchy_mommy]

I am contributing I think 6% to my 401K (with employer match) -- DH was doing the same until he started a new job & won't have 401K for a year. So I guess we should consider IRAs (and rollover DH's old 401K)? I am so clueless on retirement accounts.

[KellyAnnW]

Can you do both? Pay down debt and continue to save (just not as much).

[crunchy_mommy]

Oh we will definitely continue to save SOME amount no matter what, I guess I am just trying to figure out the value in paying off the loans early (once you factor in the tax deductions etc.) and if we are better off building up the savings more instead. I guess that paying a little extra on everything is another option I hadn't even thought off! (I tend to be very black & white/all or nothing )