Ask Money

Thinking about savings and debt

Chris Farrell Jan 4, 2012

Question: I’ve got a bunch of student loans, all at relatively low rates (3.5 percent and lower). I have just under $35,000 at this point. I’ve been auto-transferring money into my savings accounts — for “emergency funds” as well as future goals such as a down payment, wedding, etc. I have around $48,000 total in savings (between those funds). That money is sitting in savings at less than 1 percent. Mathematically, it makes more sense to pay down the debt. But I’m not comfortable with decreasing my savings that much. How to I choose? Stephanie, Medford, MA

Answer: I love it that you’re automatically transferring money into your savings accounts to cover emergencies and to fund opportunities. The auto-transfer is a powerful way to save.

You’re right about the math when it comes to the yield on your savings vs. the interest rate on your debt (although the rate on your student loans is low). However, you’re also right to worry about draining savings during these tumultuous times.

What do you think of this idea: Pay down debt to the comfort point. First, calculate how much of a margin of safety you need now. For instance, look at your expenses, your job security, the possibility of a big bill coming up (car repair, elective surgery, etc.) and see how you stand financially. Then, once you have those numbers in place, see if you’re still comfortable mentally and financially after taking $1,000, 5,000, $10,000 or some other sum out of savings and putting it toward paying down principal.

You would reduce the overall cost of your education, bring the day of being debt free closer, yet still preserve a healthy financial margin of safety.

In other words, rather than making it an either/or question — preserve savings or pay off debt — it might be better to figure a financial compromise.

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