Keeping Savings Accounts vs Paying Off Debt

Minuscule savings rates

 

This post on savings accounts vs paying down debt is post #4 in my series on financial freedom and spirituality.

Once I had paid off my monthly bills and the ones due in the next month that were on my Capital One card, I was ready to take a stab at paying off my car, with focus on paying off the house not far behind on the horizon.  Of course, this meant yet another spiritual lesson.

I’m a big believer in having a go-to-hell fund, though that’s not what I call it.  It’s known by various names but essentially, it’s the amount of savings you need to set aside in case you decide to tell your boss to “Go to hell” and quit on the spot.  It should usually be enough to tide you over for anywhere from 3 months to 1 year, or however long you think it might take you to find a new job.  I prefer, in these uncertain times of sequestration and fiscal cliffs, to think of it as my “safety net.”  What it does, regardless of what you call it, is provide either freedom or safety for a limited amount of time while you get to a (hopefully) more stable place in your life.  For the last almost decade, I’ve had about 8 months of expenses stashed away in savings accounts and high yield CDs that could be broken if necessary.  I’ve had to dig into them here and there for major house repairs but then refilled the coffers.

There’s something in my background that yells at me (it’s someone in particular’s voice) for not having my emergency stash in complex investments, but an emergency fund should be liquid or pretty darned close to it.  As Sequestration approaches–and with it, the likelihood that my salary will be cut 20% because I’m a Federal employee–I’m glad I have easy access to savings that will put gas in the car, keep the lights on at home, and buy my monthly adrenal supplements.

In looking at how to pay off my car, it struck me that my savings were not in the same situation as a couple of years ago, and that by March, I would see significant changes in the interest my savings earned.  Through the end of 2012, my safety net was earning anywhere from .25% to 1.0% for savings and up to 9% for CD’s.  Yes, 9%.  I’ve always set up my safety net in 6 month increments, so a portion in a savings account and then several tiers of CDs coming due in 6-84 month increments.  The oldest increment was at 9% from back when CD’s paid worth a damn.

Oh…..  That got me thinking.  My car payment (including interest)  was going to stay the same for another 3 years, whereas my savings interest earned was about to plummet to around 1%.  My safety net wouldn’t even keep up with inflation.  So this was the spiritual test.

How much faith do I have in being taken care of by the Universe in 3 months?  6 months?  8 months?

I decided I could manage on a 6-month nest egg and put 2 months of almost interest free savings on my car debt.

That was the biggest chunk of funds I put toward my car to pay it off.  The rest would come from other sources.

Since I made this decision, Sequestration has become more likely and I’m already planning for being forced to not work (and not earn my paycheck) for one day out of five.  I do not at all regret paying off the car early because that’s a payment I don’t have to worry about on a skinnier paycheck.