M is for Money

To save or to pay down debt, that is the question. And it’s a question that gets asked a lot. I took a different path, I did both.

I can hear the audience groaning through the computer, yes I know I paid more interest that way. I had a good reason for doing it. When it comes to money, people are not rational. We make decisions based on mood, emotion, whim even spite. Any financial system that expects you to behave rationally all the time is bound to fail. My debt was an indictment of my past spendthrift ways, my savings a sign of hope for the future. Starting a savings account and investing for the future was as important to me as paying off debt, even if it meant I paid more in interest.

I’ll be Out of Debt When?

Have you ever tried one of those debt repayment calculators? The ones where you put in your balance, interest rate and monthly payment and it tells you how many millennia it will take for you to pay it off. I did, and the results were discouraging. I didn’t want to put off saving till the distant future, I wanted a sense of accomplishment now. Financial pundits drum in to you the importance of starting your savings early, and the value of compound interest. Wasn’t waiting a compounding of my earlier mistakes?

Two Reasons to Save First

I was living paycheck to paycheck for no reason. I had no savings, I had no plan and I had no worries. I was naïve, invincible, the typical 20-something. It was no way to live and feel responsible. The number one reason to start a savings account today is the unknown. Call it an emergency fund, a rainy day fund, or the car needs a new transmission fund, at some point you will need more money than you have in your checking account. I don’t care if debt reduction is your only goal, you need an emergency fund. Without it you become a hamster on a wheel, paying down debt only to see it creep back up again.

Does your employer offer a retirement plan and do they contribute matching funds? If the answer is yes, then you need to contribute. An employer match is free money and your contributions reduce the tax you pay. My earlier point about starting early to take advantage of compound interest is especially true for retirement savings. Saving for retirement becomes much harder if you wait till you are 40 or 50 years old to start. At a minimum, contribute enough to get the full employer match and set aside $1000 as an emergency fund before attacking your debt.

A Different Path

In setting my budget, I put equal weight to savings and debt. It meant I stayed in debt longer than if I had focused solely on repayment, and paid more interest over the years. If you crunch the numbers, this is not the ‘rational’ financial decision. But as I already stated, people are not rational when it comes to money. My growing savings were a point of pride, proof that I could change from a spender to a saver. Saving is addicting, once you start it is hard to stop. My method is valid, if not ideal, since it gets you in the habit of saving now. I’m sure you have heard a story or two of someone who arduously climbs out of debt only to fall back in the hole. Part of fixing your debt problem is changing your habits, and taking up the habit of saving is a good first step.

Eventually I had a positive net worth despite still carrying debt and by the time I paid off the last of the credit cards, I had over $25,000 in savings and investments.

A Big Fat Warning

I’m not here to tell you to follow my path - I’ve already shown you it’s not the rational one! I have a different point to make with this story. Choose your own path for getting out of debt and saving for the future. Make a plan that works for you, regardless of what the experts say. I got out of debt my own way and you can too.