# Repay Debts or Save



## Dave27 (7 Sep 2007)

Hi,

I'm 27 and have debts of about €14k built up from my early 20's. I'm repaying these debts at €380 a month. I'm now in a job earning €40k. I could probably double these repayments.

But I am wondering am I better off putting the extra €380 into a savings account so I have a bit more flexibility if anything comes up?

Any thoughts appreciated.


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## GeneralZod (7 Sep 2007)

Focus most of your effort on paying off the debt since it's at a higher rate  than available rates with savings. DIRT brings savings returns down by a fifth too.

Have a small emergency fund (maybe €500) so you're not living completely pay cheque to pay cheque. Avoid any further use of credit.

When you've got the debt paid off you can build up a better savings cushion. As that grows it can become a deposit on a home.

Can you reduce your expenditure too and concentrate even more than you're planning on repaying the debt?
Any chance of bonus payments from work? Use them to repay the loans too.


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## Dave27 (7 Sep 2007)

GeneralZod said:


> Can you reduce your expenditure too and concentrate even more than you're planning on repaying the debt?


 
I could probably repay €1,000 a month if I really cut back. But that would mean drinking wine from Aldi at home instead of going to the pub.


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## GeneralZod (7 Sep 2007)

Perhaps you could set a target to have the loans cleared by. Say within 16 months.

If any of the debt is with credit cards consolidate it into a lower interest loan. 

You could try moving it to 0% for 6-9 months credit cards if you can get one.


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## Dave27 (7 Sep 2007)

GeneralZod said:


> Perhaps you could set a target to have the loans cleared by. Say within 16 months.


 
I could do that, but it would be a very lean 16 months.

What about the arguement that say in 3 years time I could be earning say 50% more. Would it not make sense to minimise the debt repayments now and improve my monthly cashflow and then take care of them in a few years when I can better afford it?


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## ClubMan (7 Sep 2007)

Dave27 said:


> Would it not make sense to minimise the debt repayments now and improve my monthly cashflow and then take care of them in a few years when I can better afford it?


Not from the point of view of cost - i.e. the total interest costs if you start paying off the debts now versus leaving them to rack up more interest into the future. Putting money away into savings/investments while carrying debt usually makes no sense. I certainly don't think that it makes sense here.


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## Dave27 (7 Sep 2007)

ClubMan said:


> Not from the point of view of cost - i.e. the total interest costs if you start paying off the debts now versus leaving them to rack up more interest into the future.


 
Maybe I'm wanting to have my cake and eat it here but if I repay €1,000 a month my cashflow will be reduced by €620 a month for the next 14 months. 

If I keep the repayments at €380 I will continue having to make repayments for 36 months but I will have €620 more each month for the first 14 months and €380 less for the next 22 months.

Not having €620 more a month now would be harder to take than having to repay €380 pm in 2 and 3 years time.


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## GeneralZod (7 Sep 2007)

Dave27 said:


> What about the arguement that say in 3 years time I could be earning say 50% more. Would it not make sense to minimise the debt repayments now and improve my monthly cashflow and then take care of them in a few years when I can better afford it?



I'd agree with the "improve cashflow" part of that but only by earning more not by delaying debt repayments.

It's an argument I often heard in my twenties from people with similar earning capacity. All the ones I can think of still don't own a home or have huge mortgages now.


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## Dave27 (7 Sep 2007)

GeneralZod said:


> It's an argument I often heard in my twenties from people with similar earning capacity. All the ones I can think of still don't own a home or have huge mortgages now.


 
I haven't even considered getting a mortgage. 

Is that the ultimate end game? What's the advantage of buying a home in the current climate of falling prices?


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## GeneralZod (7 Sep 2007)

Dave27 said:


> Is that the ultimate end game? What's the advantage of buying a home in the current climate of falling prices?



It's probably the end-game for most people fortunate to be on a reasonable salary. 

There's absolutely no reason to buy right now. But you're not in a position to right now anyway. 

The average age for someone taking out a mortgage is in their early 30s. To be one of those people 5 years down the road you need to start preparing now.

I'll make a generalisation now that mightn't be correct but most people that buy a house get out of college in their early 20s, then spend 3 - 5 years carousing and being the ideal customers for banks. Then as they approach their late 20s they start to worry more about their future and learn the concept of delayed gratification which has been completely alien to them up until then.


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## Dave27 (7 Sep 2007)

GeneralZod said:


> I'll make a generalisation now that mightn't be correct but most people that buy a house get out of college in their early 20s, then spend 3 - 5 years carousing and being the ideal customers for banks. Then as they approach their late 20s they start to worry more about their future and learn the concept of delayed gratification which has been completely alien to them up until then.


 
OK so you're saying being debt free is more important than cashflow or savings.

Say then I increase my repayments to €1,000 pm. What do I do if I have other unforeseen expenses that my emergency fund doesn't cover. Do I take out another loan?


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## GeneralZod (7 Sep 2007)

I'm not saying €1000 pm. Set it at the max you can afford without making yourself miserable. If you're worried about having a contingency fund you could stage the payments through a savings account (e.g. RaboDirect) first and every time it reached say 3-5k take a big chunk out of the loans. This might give you the comfort you seem to be looking for. There's the risk of temptation taking over here though and the cash being blown on something like a holiday or big LCD TV.

What unforeseen expenses to you foresee?   What commitments do you have that might present one of these unforeseen events? Will any of these be strictly necessary expenses or just be lifestyle expenses?


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## jwestave (3 Mar 2009)

im in a similar situation and this post help


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## Bronte (4 Mar 2009)

Dave27 said:


> I could do that, but it would be a very lean 16 months.
> 
> What about the arguement that say in 3 years time I could be earning say 50% more. Would it not make sense to minimise the debt repayments now and improve my monthly cashflow and then take care of them in a few years when I can better afford it?


 
Do you not consider that actually being in debt is a very bad way to be?  A person on your salary should not have debts of 14K, if you are thinking along the lines of your post above you have not learnt proper financial management.  What is wrong with a short lean period of 16 months.


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## PaddyW (4 Mar 2009)

Short term pain = long term gain.


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