Saving v. Paying Down Debt

Before the Great Recession,  interest rates were higher than today’s bottom feeder rate.  Funny, back then, Americans, generally, weren’t saving much.  In fact the savings rate was either zero or a negative number.

Since the Great Recession, the savings rate has leaped to a high of more than 4%, maybe close to 5%.   With so many Americans out of work, the fear of not having money, not being able to pay the mortgage, not being able to feed one’s family, has caused Americans to make savings a #1 priority.

So, should one consider paying down debt in such an environment?  I say YES.

Maybe someone else would say NO.  Be like a squirrel and hoard all your acorns.

IMHO, one should definitely have a  savings cushion (personally, more than the $1,000 that Dave Ramsey recommends.  That’s not large enough of a safety net for me).  But once you have a safety net (emergency fund) you feel comfortable with, start paying down that debt.

Before the Great Recession, when interest rates were higher, I did save quite a bit one year.  I purchased a one year Add-on CD from my credit union.  The minimum amount to open – just $100.  The minimum “add-on” amount – just $25 per transaction.  I experienced a thrill, a high , as I added every extra $25+ to the CD.  And I save a lot more than I originally expected.

But the high, the thrill of saving a lot of money DOES NOT COMPARE to the pure satisfaction of paying off a debt.  Between 3 October 2008 and 15 May 2009, I paid off a home equity loan (for my rental property) totaling $24,646.18.  When I paid off that loan on May 15th, I sent e-mails to lots of friends, basking in my MISSION ACCOMPLISHED.   [Funny, I didn’t send such an e-mail when I saved a lot of money one year].

Presently, I’m paying down the rental property’s mortgage.  On 2 January 2010 the balance was $35,974.00  As of two days ago, 1 May 2010, the balance is $18,351.01.   And, if all goes according to plan, I’ll send out another Mission Accomplished e-mail by the end of this October.

Paying off debt is more rewarding, definitely a greater sense of accomplishment. Even Dave Ramsey knows it.  On his radio program each Friday, he encourages listeners who have recently (within the last two weeks) become debt free, everything but the house or everything including the house, to call and make their I’m/We’re debt free scream.

Interestingly, there is no special recognition, positive encouragement or celebration for those who have achieved step three – a fully funded emergency fund (3 to 6 months of expenses).  Ever wonder why?

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