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Pay Off Debt, or Build Up Savings?
By Jay | January 21, 2008
I’ve been thinking over the the long weekend about how I want to reconfigure my financial plan in light of the recession that seems to be upon us. Markets around the world are plummeting today: China and Brazil are down 6%, and India by 7.8%. My poor, battered 401k plan is 20% allocated to Emerging Markets, so I will feel the pain. As far as developed markets are concerned, the Nikkei is down 3.8% and European markets are down by 3-6%. These are some of the biggest daily losses in five years.
I work in technology for a financial services company, and I believe that layoffs are imminent. I’m not sure if I’ll be on that list, but it’s time to prepare just in case. If we are coming into a recession, I can expect that it will take 6-12 months to find a new job, that the new job will probably not be in technology, and that it will probably not pay as much as what I currently make.
I currently have $2,300 in my emergency savings fund — about a month of expenses. I’m also due for a refund from the IRS of about $3,300, which will go right to my emergency fund.
I had been budgeting $1,500 per month for debt payoff this year, but I have decided to make only minimum payments on my credit cards, and to put all other money into my emergency fund. The interest on my debt is 4.9% or less, so I can live with it for a while.
In the past I’ve noticed that the months when layoffs happen in my firm are April and November. If I can hold onto my job until April, I’ll have $10,000 in my emergency fund, which will cover 4 months of frugal living along with credit card payments. As I noted a couple posts ago, my firm is generous with severance, generally giving out a year’s salary to long-term employees over 40. I would be delighted to get a year’s salary, but the firm has taken huge losses over the past few months, so I’m not counting on more than 6 months severance.
At any rate, that would take me through the end of the year, and I’d still be saving $1,500 per month, which would mean my emergency fund would be $20,000 by the end of the year. Throw in some part-time employment and I should be ok through next year. I’d be poor, but I would survive.
But there are a lot of “ifs” in my financial plans. So I guess I have one more “if.” If and when I get to $30,000 in savings, which is 12 months of living expenses for me, I will start paying down debt again.
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Stumble it!
January 21st, 2008 at 2:01 pm
I’m sorry to hear that you may be losing your job. If I were in your position, I would using every penny I could to build up the emergency fund.
January 21st, 2008 at 9:43 pm
Hang in there. You’ve got a great plan. Its good that you are getting prepared for the worst before it might happen. If it doesn’t you’ll be that much better off.
January 22nd, 2008 at 10:10 am
Planning for the worst is a great way to mitigate the risks in life. I think you’ve got a pretty good plan in the works here; stick to it and if you don’t get laid off you might be able to start paying down debt quicker.
January 23rd, 2008 at 9:01 am
Yes, good advice. Thanks everyone. Bottom line: with the job market changing I need more of a cushion to feel comfortable, and building that up will be my priority this year.
btw has anyone else’s mail been flooded with 0% transfer offers over the past week? I got about 6 different ones yesterday.
So far I’ve seen offers for up to 18 months. I’m waiting for the one that is for the life of the loan.
January 25th, 2008 at 12:47 pm
Have you considered putting yourself out there for part time or consulting work? In addition to possibly being able to stash a little more money away from it, you’d be networking and padding that resume in case of the worst. Hell, you may even find a company you like better and it would be serendipity all around!
January 29th, 2008 at 9:09 pm
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