DFA reader Barb asked:
I am 43 years old and have student loan debt of $17,000 after recently going back for my masters. We have $20,000 saved in a money market account. My husband is 44 and currently has $10,000 in student loans currently in deferment. He will graduate next spring. The minimum payment for my loan is $125/month and the interest rate is 6.4%.
How much of the money market savings (which we use as our emergency fund) should we use to pay off the student loan?
Great question Barb, let’s take a look!
- You have a total of $27,000 in student loan debt. Since we don’t know your husbands loan rates we’ll just assume they’re the same as yours – 6.4%.
- You have $20,000 saved in a money market account for emergencies; it is probably earning you around 1% interest.
Now we’ll discuss your options as I see them, and I will assume you have no other consumer debt since you didn’t list it.
God Will Provide
If you’re inclined to believe in God and His Word then you can trust what He said:
“Therefore take no thought, saying, What shall we eat? or, What shall we drink? or, Wherewithal shall we be clothed? (For after all these things do the Gentiles seek:) for your heavenly Father knoweth that ye have need of all these things. But seek ye first the kingdom of God, and his righteousness; and all these things shall be added unto you.” Matthew 6:31-33
He promised to provide. When we believe Him he counts it as righteousness.
How much should you have saved for emergencies while in debt?
That is the million dollar question, and there is no one correct answer.
A popular strategy is to save only $1,000 and use the rest to pay off debt. Another option is to save enough for 1 – 3 months expenses. Betsy and I chose the latter, but everyone needs to make their own decision based on comfort levels, work situation, etc.
I recommend you go somewhere in the middle.
If your income is somewhat secure, save enough for one month’s expenses (let’s assume that is around $3,000) and use the rest to pay off debt.
This leaves you enough to pay off your student loans while still providing a level of emergency security.
As mentioned above, paying off your student loan frees us the $125 each month.
You now have options.
- Continue saving the $125 into the emergency fund.
- Take your husbands loans out of deferment and begin paying them off.
I only recommend deferment in desperate situations, so I would like to see you put it toward his loans.
The sooner you begin repayment, the sooner you’re free of the debt.
Great job saving the money! Now leverage it to work for you by paying off your debt while saving enough for emergencies.