One of the very first steps to paying off debt is actually to have some money in savings first.
If you’re wondering why savings has anything to do with paying off debt, I think there’s two important reasons.
1: If some unexpected expense pops up (new tires for your car, you have to pay your insurance deductible, etc.) you have some money to take care of it instead of putting the expense on another credit card.
and 2: There comes a certain mindset shift that comes with having some money in a savings account, all to yourself. You have the peace of mind that if anything goes wrong, you’ve got some cash to cover it (see #1.) But it also makes it a reality that yes, you have some control over what you do with your money. You have the right to put some away.
So if you’re focused on paying off debt, I want to help answer the question of how much you should have in savings before (and during) the debt payoff process.
I hear $1,000 is a good number to save, is that right?
This one is kind of a yes and no to me. $1,000 is the number that me and my husband decided to save, but we didn’t come up with that number on our own. That’s simply what all the advice I was reading said, and what Dave Ramsey suggests to start your baby emergency fund with.
$1,000 is a great point to start at, for a few reasons. There’s a lot of minor emergencies that can be covered with $1,000 or less. For instance, when our fridge went out on New Year’s Eve and we ended up throwing away our entire refrigerator’s supply of food twice, $1,000 would have been plenty to cover the purchase of a new fridge (and to restock the food in it).
If you were to get into a car accident, or had to file an insurance claim for property damage on your house, $1,000 would probably cover the cost of your deductible. If you don’t have an auto sinking fund set up, $1,000 would easily cover the cost of new tires and a tuneup.
As you can see, $1,000 is a great number to start at, and if that’s the number you end at, that’s OK too.
$1,000 just doesn’t seem like a lot of money, I get nervous having my savings account that low.
I hear this one a lot, and I’ve got to say, I totally understand. I’ve read stories of people over and over again who have a healthy amount in their savings (think 5 to 10k) and the thought of taking that number down to $1,000 just to pay off debt is terrifying.
To a lot of people, having a savings account for emergencies is a huge priority. They know that there’s so many ways that life can go wrong, and they enjoy having the peace of mind that they can pay for something big if it comes up such as a minor hospital stay or a good used vehicle if the old one decides to die.
I don’t think there’s anything wrong with that way of thinking. I believe that people should do what’s right for themselves and their families. My advice would be to cap the account at $5,000 and use whatever else is in the account to pay off debt. That could be a huge chunk towards a credit card, car loan, etc.
I’m still uncertain, how do I know what’s right for me?
While you’re the only person who can decide what’s right for you, I think there’s a way you can come to your decision with confidence.
First you’ll want to decide where your biggest priority lies right now. Is it getting out of debt as fast as possible? Then you may be more comfortable on the lower side of savings. If it’s having the peace of mind of protection for your family, you’ll probably want to save more than $1,000.
After you’ve determined your top priority, you’ll want to bring that to a discussion with your spouse or partner, if you have one. Ask for their opinion, and see where their priorities lie right now. Maybe they’re somewhere in the middle, and you both can compromise on saving $2,000, for example.
Finally, examine your situation. If you’re in a steady two-income household with stable jobs, you probably don’t need to have a whole lot in savings (at least for now.) On the other hand, if one of you is a stay-at-home parent while the other works on commission or their job depends on the weather, it probably makes more sense to have a few thousand in savings. This will put a bigger barrier between your family and the unexpected.
There is no right or wrong answer of how much money you should have in savings while paying off debt. I believe that everyone should choose between $1k and $5k depending on their family’s situation. Just settle on a number that gives you protection from the unexpected and peace of mind, and you’ll be set.
And always remember–paying off debt will not last forever. Soon you’ll be free from debt and can stack up as much in savings as you dream!