July 15, 2024
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‘I’m scared if something happens we will be forced to go into massive debt again’: Should we focus on paying off our last loan early or start saving for emergencies?

‘I’m scared if something happens we will be forced to go into massive debt again’: Should we focus on paying off our last loan early or start saving for emergencies?

Hey Money Minder,

So, here’s the scoop – my hubby and I got hitched young and were pretty savvy with our money at first. We saved up, bought our first home at 25, and then suddenly went off the deep end by splurging on all sorts of stuff for the house, racking up a load of debt.

But hey, after 4 years of struggling, we’re finally seeing some light at the end of the tunnel (phew!). We’ve managed to pay off our car and 2 out of 3 credit cards. The last credit card will be history by the end of August.

Now, here’s where we need your expertise. Should we throw extra cash at getting that personal loan paid off quicker or focus on beefing up our savings? My husband just started contributing to his 401k, and I’ve already got retirement plans through work. We’re feeling pretty good about retirement goals, but I’m losing sleep over our emergency fund. We’ve only got about $1,000 saved up, and the thought of going back into major debt terrifies me.

So, what should we do? Knock out that last loan pronto or start beefing up our savings, considering it’s set to be paid off in 15 months anyway? Any advice would be super appreciated!

Thanks a ton!

Seeking Guidance

Response from THE MONEY MINDER:

Hello There,

Congratulations on the progress you and your husband have made in paying off your debts! It’s a significant achievement that should not be underestimated. It’s clear that you are determined to improve your financial situation, and that’s a great place to start.

Given that your personal loan has an APR of 12.99%, it makes financial sense to prioritize paying it off early. The interest you save by paying off the loan early will likely be higher than any interest you could earn from saving that money instead. By focusing on paying off this debt, you will free up more of your income for savings in the long run.

However, I completely understand your concerns about emergency savings. Having only $1,000 saved up can indeed be risky, especially if unexpected expenses arise. A good rule of thumb is to have 3-6 months’ worth of living expenses saved up in an emergency fund. Therefore, after you’ve paid off your personal loan, it would be wise to prioritize building up your emergency savings.

In terms of retirement savings, it’s fantastic that both you and your husband are contributing to your 401k plans. Starting early is a key factor in building a solid retirement nest egg. Your husband may have some catching up to do, but with a focused plan, it’s definitely achievable. After you’ve tackled your personal loan and emergency savings, you can consider increasing your retirement contributions to further secure your financial future.

In conclusion, I recommend prioritizing paying off your personal loan early, as the high APR makes it a costly debt to keep. Once that’s cleared, shift your focus to building up your emergency savings to provide a safety net for unexpected expenses. Keep up the good work on your retirement savings and continue on the path towards financial stability. All the best from THE MONEY MINDER!

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