Should I Cash in My $13,000 in Savings to Pay Off My Debt?

It happened overnight. I awoke yesterday morning, got ready for work and logged into my Mint.com account. And there it was, staring me in the face. Taunting me, mocking me, asking me in a teasing voice: “So whatcha gonna do now, financial genius?”

$13K in my SmartyPig savings account. $13K in student loan debt

The amount of money I have saved up for my long-term financial goals now equals the balance I owe on my student loans.

I could wipe out all of my debt with one stroke of the keyboard.

It’s so tempting, it’s not even funny.

My Financial Goals vs. My Hatred of Debt

Ever since I started working, I’ve socked away money for some important medium and long-term goals: my wedding (someday in the to-be-determined future), my on-going education (a degree or otherwise), my trip to South Africa and Mozambique next year. I even have a “whenever I quit my job and I want to travel for a year” fund.

But one of my biggest financial goals is to pay down my student loans as quickly as possible. I’m not one to care about comparing interest rates, but I am one to compare opportunity costs. At the rate I’m going, I still have a few years until I’m finally debt free.

What Should I Do with My Debt?

Deciding what to do with my money is always a thoughtful and hugely emotional decision. That’s why I need some outside counsel 🙂

So what should I do? Do I keep plugging away at my debt and wait another two or three years to pay it off? Should I cash-in all or some of my savings to accelerate the process?

What would YOU do?

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23 thoughts on “Should I Cash in My $13,000 in Savings to Pay Off My Debt?

  1. Evan

    Sounds like a quality problem! From an emotional standpoint, I can understand the urge to eliminate the debt once and for all – would feel extremely liberating.

    Pro’s of paying off the debt: eliminate stress, provide more freedom in work/life choices (just need to make enough money to live) and give you peace of mind / allow you to think more clearly when making big decisions.

    Con’s of paying off the debt: you could put that money into starting a new business (i.e. creating an asset) or furthering your education (hence increasing your future earning potential). Both of which would accelerate the loan repayment process – if you can bare the patience required to do so.

    There’s no easy answer! I’d be very tempted to just hit the reset button and start from ground zero myself. but you need to compare the opportunity cost of how that money could get you further, faster. (business, education, etc). If the savings aren’t going towards income generating activities, then you’re better off paying off the loans now.

    Or, you could always flip a coin 😉

    Best of luck with the decision & keep us posted!

    Reply
    1. Stephanie Halligan Post author

      Haha, maybe a coin flip is the best option 🙂 Sometimes I feel like I should take the moderate route and use some but not all of my cash. But I feel like if I go half-way in (cash out some savings), I’ll just feel half as good. I’ll have less savings and still have debt!

      Reply
  2. Abigail

    I think it’s always going to be a matter of what you’re comfortable with. I hate debt, but if I had $13,000 in savings I’d hate to see that go, too.

    I think you have to consider how long it took you to get to $13,000 in savings, and how long it’ll take you to get rid of your student loan at your present pace. Figure out which number you’re more comfortable with.

    In the end, it might make sense to throw, say, half at the loan and then increase the amount paid on the loan each month. That way you still have savings, but you also have a plan to speed (even more) through debt.

    Of course, you also have to take into account job stability and other factors I can’t speak to.

    Reply
    1. Stephanie Halligan Post author

      That’s a great point. It took me awhile to get to $13K in savings. I don’t want to throw that away either. But I also would free up a lot of money that I could put toward savings every month if I didn’t have these student loan payments.

      Reply
  3. Money Beagle

    I’ve been tempted by similar actions. I guess you have to ask what your goals are that you would be pushing aside by paying off the debt. You could replenish the money since you won’t be paying on the debt, but it will likely take awhile to rebuild that balance or whatever balance you are looking to achieve.

    There’s always a trade-off and you have to ask yourself whether the zero debt goal would put you ahead or behind in terms of the relative importance of what it would do to your other goals.

    Reply
    1. Stephanie Halligan Post author

      Yup, I think I just have to weigh the importance of all of my goals – being debt free vs. everything else I want 🙂

      Reply
  4. Takao Yamada

    Hey Steph,

    If I were in your shoes, I’d pay half of your debts off. If you were willing to pull the trigger on the whole debt, then half is not as hard to pull off and it is still a significant dent.

    Then I would use the other half and start a investment portfolio with the goal to fund your other financial goals (medium and/or long-term). But don’t forget to have an emergency fund as well that is easily liquid-able for quick access.

    Reply
    1. Stephanie Halligan Post author

      Good point. I love SmartyPig and all, but I need to put some of this money where it can get a real return 🙂

      Reply
  5. Sarah G

    I definitely agree with Abigail about thinking about how long it took you to save up the 13k. I think that the monthly dent that it takes out of your total earnings may seem small compared to the flexibility you will lose with that money gone from savings. I recently noticed one of my loans was getting to a much smaller amount that I could definitely save for to pay off rather soon — for me keeping the savings for any future unknowns is more worth it than the (pretty small) monthly payment each month.

    Reply
    1. Stephanie Halligan Post author

      Sarah, awesome point. Feeling confident that I can handle future unknowns and the flexibility a lot of savings gives me is really worth a lot to me. Maybe more than being debt free right now… I’m just realizing how impatient I am!

      Reply
  6. Devin T.

    My SO and I had a similar problem recently. The answer in her case was pretty easy, as she had two loans that were at over 5% interest and two more than were below 2%. We paid off the high interest ones, took the savings from not having to make a montlhy payment on those two and rolled it into the auto-pay for the others, and dumped the remainder into her IRA. Win-win-win.

    It really all comes down to the rate of the loan you’re looking at paying off. I realize we all want to be sitting in the black in each item, but sometimes its alright to have a red-line so long as the liquid assets that would go towards that are making a higher return in another line. Zoom out for a sec and look at the big picture of your finances and see if that helps.

    Reply
    1. Stephanie Halligan Post author

      Devin, good point. I need to break down my monthly payments vs. my savings rate and see how those compare. I don’t really care too much about interest rates… honestly, I think there are bigger opportunity costs in this world 🙂

      Reply
  7. Sean

    What’s the interest rate on the debt? I know with my loans having as low of an interest rate as they do – it makes more sense for me to keep it, put the money to better use, and pay it down as I go.

    There will be a point soon where I’ll probably just pay it all off now. But even if you took, say half of that money and invested it in your business, how much more money could you create?

    I bet it’s more than you’d be saving by paying off the loans right now.

    Just my two cents, either way congratulations on getting there with your savings!

    Reply
    1. Stephanie Halligan Post author

      It’s totally all about opportunity costs, Sean. I’m not quite sure what my ROI is for other opportunities right now. Maybe I need to do some larger life planning before I make a decision 🙂

      Kinda just wish I won the PowerBall – then all my problems would be solved!

      Reply
  8. Matt Dawson

    I get the desire to pay off the debt ASAP. That said, if your student loans are of the federal variety, remember that this is incredibly flexible debt (and probably historically cheap, even if it’s at a higher interest rate than you’d get as a student now). If you lose your job or go back to school for some reason then you get to stop making payments on it. That can be quite useful.

    Of course if you have private student loans then my point is moot…

    Reply
    1. Stephanie Halligan Post author

      Good point, Matt. It’s about 60% private, 40% federal. Whatever amount of savings I use (if any), it should definitely all go toward the private stuff.

      Reply
  9. Rick Mulready

    First off, congrats on being in this position! I was in a similar position last year and got myself debt free. It was the first time in my adult life that I was debt free and it’s been an AH-mazing feeling. Huge weight off my shoulders.

    I’m a big believer in how Dave Ramsey teaches. In this situation, he might suggest you’re essentially taking out a loan (your student loans) to have the savings. So, is that worth it?

    His #1 priority is to get an emergency fund of $1000 and then snowball your debt, then 3-6 months emergency…

    In your situation, I might use all but $1K of your savings to pay the debt off. You can then pay the remainder of the debt asap. Then you can take all that money you’d normally pay on the loans, in addition to your standard savings, and quickly rebuild your savings.

    Just my two cents. 🙂 Congrats!

    Reply
  10. Joe Cassandra

    Not a bad problem to have!

    You could look at it financially and compare the interest rates and determine how much interest you’re going to pay over the remaining life of the loan to what return you get on savings, then see if it’s worth it.

    If it’s your emergency fund as well, probably not the best idea to wipe out your savings, but I hate debt so I’d be tempted too 😀

    Also depends on your mindset and discipline if you are able to take what you usually pay on loans (assuming you pay it all off) and put it towards savings with the amount you usually put. That should accelerate you back to 13k. I know that I’d be tempted to see the freed up money as “spending” money so I’d have trouble with that part lol.

    Reply
  11. Joe Langlitz

    Very interesting question Stephanie! Have you ever noticed how much the interest rates increased during the course of our time in school? When we began school, a studen loan was a very smart move (not only for the sake of getting a good education) because you could earn more interest in a private bank account than would accrue on your student loans. However, my largest set of loans has an interest rate of over 6% and I’d be very interested in finding a savings account that is earning more than that these days. Others have raised good points about not cleaning out your savings entirely for the sake of becoming debt free. Possibly you could pay off the loans that are accruing higher amounts of intrest (in one or multiple payments). I’m not sure what your loan distribution is like, but my loans increased as I continued in school and those are the ones receiving 6.8% interest. Paying those sets of loans down first might be a good starting point. Hope that is helpful.

    Reply
  12. Anthony

    Hi Stephanie,
    Just found this post as I’m in a similar position – although my dilemma is whether to accrue new debt or pay in cash through my savings.
    Now that it’s been a few years, I’m wondering if you could update with what you did then and how things are going now?? Thanks!

    Reply
    1. Alicia

      I’m not sure what she ended up doing, but if it were me, I would use half of it to pay off a large portion of the debt (particularly the privatized portion which will likely have a higher interest rate), but then save the rest for whatever your goals were to begin with. I’m in a similar situation, to where I can pay of half of my college debt in a matter of seconds, but it’s taken me so long to get that money saved that the idea is frightening. Still, thinking of shaving off 6 years of payments sounds so nice. I’m making a compromise – I’m paying off 1/4th of the student debt, and continuing to save for “bigger and better things” with the other amounts.

      Reply
  13. Wissam

    The very yesterday i took my 9,000$ and payed off my personal loan.

    Feeling good today, knowing that i dont have to pay any loan payement from my next salary. And now start saving again, reaching the 9,000$ much easier than before, knowing that my monthly fees are being added to my saving account now.

    Also the dept free feeling is amazing.

    Reply

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