The War On Debt: Save, Pay Down Debt, Or Both?

The war on debt: save, pay down debt, or do both?I read a quote recently that was attributed to Warren Buffett, which went something like, “Do not save what is left after spending, but spend what is left after saving.”

I suspect Warren wasn’t in debt when he said that.

The fact that we had no retirement fund was a niggling worry that we simply pushed away because other things were more immediate—until I watched my parents move into a special care home a year ago…

They had a decent pension. And a lump sum from the sale of their house. But without the provincial financial subsidy that helps pay for their 24-hour care, they would certainly outlive their money.

Since my husband and I have spent a good portion of our working lives as entrepreneurs, we have not paid into any pensions. Our house will be ours by the time we retire...

But if we don’t act now, it’s the only money we’ll have.

And given the uncertain condition of the provincial coffers, I am skeptical that any such government senior care subsidy will exist 30 years from now.

My Three Needs

But I’m not just concerned with retirement—I’m concerned with the here and now.

You could save for anything, I suppose, but for my purposes I’ll just name three:

  1. retirement,
  2. emergencies, and yes…
  3. vacation.

The first two are necessary. The last one is for my sanity.

But considering my deep financial burden, here’s my question:

Is it better to devote all my resources to paying off what I owe before I save anything? Or should I manage to do both?

Money Tips

I spoke with a couple of money savvy folks who provided two different perspectives.

1. Pay yourself $25 a week to start

“Pay yourself first, even if it’s small,” says Kathy Nutter, a former personal banking officer with Scotiabank and currently a Maritime mortgage broker with The Mortgage Centre.

“They say 10 per cent, but that’s not feasible for some people. Even $25 a week is a start. Then you can increase to $30, and it’s surprising how it builds.”

She hastens to add that paying debt should still be your priority. “Banks are so eager to hand out credit, and people don’t realize the consequences. I’m a mortgage broker now, and it’s not our mortgages, but our unsecured debt that’s killing us.”

Related: 10 Ways to Save on Home Insurance

2. Focus

Her advice is to narrow your focus. “People get overwhelmed looking at the whole picture. So make minimum payments on the other debts and pay off one debt at a time—preferably the one with the highest interest.”

3. Set aside money for emergencies

And yet, she insists that the notion of setting aside a nest of money for emergencies is still necessary…

Because, “you’ll end up putting the expenditure on credit cards anyway. When money is automatically put in an account, people have more success. Otherwise, they keep putting it off. They say, ‘I’ll do that tomorrow,’ and it gets spent before they get around to it.”

4. Or, pay off debt first

While he agrees that saving money is useful to establish good financial habits, Graham Cochrane has always preferred to focus on paying off debt.

The senior IT manager at TD Bank group has spent his career in the financial industry. But when it comes to his personal finances, he chose to take a different path than was commonly advised.

“In my early days, we always heard that people needed to have three to six months of emergency income, sitting in a savings account,” Graham says, from his home in Mississauga, Ontario.

“I’ve never done that, actually, I’ve kind of done the opposite. Okay, let’s say I was aiming at $10,000 in cash. Why would I put it in a liquid, stable account and get very little return, with taxable interest, when I could put it on my debt, on a student loan for example, which at the time was about six per cent? Why would I set cash aside and get nothing for it?”

Graham qualifies this with the acknowledgement that he never lost a job or had an interruption in income. But he felt that not paying down debt was the bigger risk.

“Part of my rationale was that I already had lines of credit I hadn’t used. They were already open, not something I would have to negotiate in the middle of a crisis. [I thought] If push comes to shove, I can borrow my emergency fund if I need to and I’ll pay down real debt today.”

Related: Plan Ahead: My Best Financial Tip

5. Save for retirement

Conversely, he believes that saving for retirement makes sense in the here and now. “The best piece of advice I received as a young person was to start an RRSP and apply the tax refunds received from the RRSP contributions directly to my mortgage.”

A Few More Money Tips

Here are a few more of Graham’s money tips:

6. Be aggressive at picking up deals

“We became aggressive at picking up deals. We would go to scratch and dent places to pick up appliances. When we had to make a big purchase, we were that much more incentivized to get a deal.”

In other words, pay down your debt—especially at the beginning of your working life—and find a way to live on the rest.

7. Sometimes it’s necessary to increase your income

“During my early days, I did consulting on the side and most of that extra money went to student debt. Necessity is the mother of invention, it forces you to get creative.”

8. Vacations ain’t all that

“I generally wait a lot longer between vacations. We haven’t done much in the way of big trips, because we have family on both coasts.” Instead, he finds a way to combine work with pleasure.

“I have to come to Moncton, New Brunswick [to visit family] for a week in August, so I’ll combine it with work in Montreal to make the travel free, because my company pays me to drive by the kilometre.”

9. Use credit cards to your advantage

“We kept the focus not on avoiding credit, but making sure we paid the credit card off every month.

Graham held up an upcoming trip to London, England, as an example. The flights and hotel for three people were $3700, but $2,000 came from credit card travel benefits.

He paid the rest out of pocket. “I don’t do that very often, but I can absorb that much—once in awhile.”

Related: Travel Points Program Basics

So What Should I Do?

I have the impression that most savings advice is for disciplined people who aren’t already in debt.

Graham is right—if I had $10,000 in savings, I would immediately throw it against The Colossus, not let it sit idle in an account. On the other hand…

I know a retirement fund is essential—something we should have been doing all along. And my own experience tells me I need to build and maintain a monthly operating cushion—even if it’s only $1,000.

As for vacations, my fund is relegated to a glass jar in the back of my closet, marked “Ireland”.

More on all these topics next time, when I’ll have a personal update for you.

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Cheryl's picture

If you've read any of David Bach's books - The Automatic Millionaire, the Finish Rich series - he says you can pay down debt and save at the same time and offers strategies on how to do it.

If you have debt sometimes you have to make hard decisions. Struggling to pay a mortgage is huge. In the Greater Vancouver Area around 90% of income goes towards housing. It doesn't always make sense to own a house. Getting debt under control and saving for retirement are huge priorities rather than doing what's expected of you and owning a house. House ownership isn't for everyone. Just like owning a business or being an entrepreneur aren't for everyone. This might mean selling, paying off debt, and renting a more economical place while building your savings and putting money aside to purchase another house. A financial advisor, and not one who's attached to a bank or credit union, can help you look at that big picture, and you will pay a fee for this consultation. I worked for a credit union's head office for many years. Staff give you free financial advice and they get bonuses based on financial products they sell you. They want to help you sure, but they also want some extra money in their pockets and they do that by selling you their financial institution's products.

Getting spending under control would be a top priority and then look at paying yourself, paying down debt, and funding retirement. This might mean getting another job or a part time job to supplement self employment income. There's lots of stories out there about couples who had huge debt, slashed their savings, got 2nd or 3rd jobs, and paid off that debt in a couple of years. You can do this!

May 18, 2017 @ 12:13 pm
DebtDispatcher's picture

Hi, Cheryl: I am currently in the process of job hunting to supplement (or replace) my freelance income, but nothing so far. I wrote an upcoming blog about the job search.

I haven't read any of David Bach's books, but I will check them out.

We don't have enough equity in our house yet to pay off all our credit debt, not for at least three or four more years. I wouldn't mind selling it and living in an apartment for a while until we have enough money saved for another down payment--or whatever--but We live on the east coast, where housing prices are generally static and substantially lower than Vancouver or anywhere else in the country, and where the market is frequently soft. Just because I put it on the market, doesn't mean I'd get the price I'd need, and I have to live somewhere.

It all adds up to, "increase your income, baby." Dunno how, but we'll see.

May 18, 2017 @ 12:54 pm
D. AuCoin
D. AuCoin's picture

I would love to know how Graham got flights for THREE people , plus hotel for a total of $3700 . Please share the secret . I have just returned from London and spent more than that for ONE person and I wouldn't say I spent lavishly .

May 18, 2017 @ 2:27 pm
DebtDispatcher's picture

I don't know, but I believe I quoted him accurately--at least, he didn't correct me.

May 19, 2017 @ 4:25 pm
Owen @ PlanEasy's picture

When deciding where to put extra money (after making minimum payments on all your debt) getting employer matching on retirement accounts should be a priority, its usually a 50% or 100% return on your contributions.

After that build a minimum emergency fund. One month of expenses.

Then its time to tackle consumer debt (anything except a mortgage). There are two approaches. Snowball, make the minimum payments on everything and then put extra towards the smallest debt first, then move to the next smallest when that one is paid off. Or, do the avalanche, make the minimum payment on everything and then put extra towards the highest interest rate first.

Snowball provides a nice psychological boost because you can pay off a small loan quickly. Avalanche is great because it leads to the lowest interest payments. That means you can be out of debt sooner.

May 19, 2017 @ 11:07 am
DebtDispatcher's picture

Thanks, Owen. All good ideas. We have begun a retirement fund--more on that next blog. The Colossus is one great, big hulking LOC, so the plan is to shovel as much as possible on it.

May 19, 2017 @ 4:25 pm
SB@OCAAT's picture

I guess snowballing is like working all the way up, while avalanche is like breaking a huge chunk. But before I opt for one of these ways, I must do a careful analysis of my financial strength. Once I achieve a clear picture of my entire financial situation, I might just get a firmer grip on my finances. After all, I need to stick to my repayment plan till the end!

May 20, 2017 @ 1:42 am
DebtDispatcher's picture

I think I would feel like i was getting somewhere if i paid a few big chunks here and there, because interest piles on so quick it's hard to make a dent. It's the most depressing part.

May 21, 2017 @ 9:48 pm
Adriana @MoneyJourney's picture

I believe balance is everything! And I think seeking financial advice is great, but you'd have to apply it according to your own needs and budget. I love that quote though, I'll have to remember that for the future :)

May 25, 2017 @ 3:58 am

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