One of my first posts I wrote here was It’s Simple Isn’t It. I invite you to go over and have a look. It’s still pertinent (IMHO).
The simple idea was the following equation:
Incoming cash – Outgoing cash = SAVINGS (or Losses if negative)
Given we have now defined debt-free do we need to change this equation? I don’t think so.
Outgoing cash is all your payments. Debt payments are included in your outgoing cash. Hence, if the difference is negative, you have losses.
I have seen this equation obfuscated. Folks who have debt claim they are saving as well. This seems a little bit contradictory. If your debts – savings is a positive number, you are definitely still in debt. You aren’t “saving”; you are just putting money aside. This money would do better paying down your debt.
Many argue you need:
- Emergency Funds
- Rainy Day Savings
- etc., etc., etc.,
Consider how much you are paying on your debt. Wouldn’t you be “saving” more by paying down your debt?
So I leave you with the question: Is it really that simple?
“Annual income twenty pounds, annual expenditure nineteen nineteen and six , result happiness.
― Charles Dickens, David Copperfield
Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery”
My list of debt commentary articles is quite long, so let's stick with the basics.
- Three Solid Ideas For Your HeLOC is a misdirection title. With interest rates going up, home equity lines of credit are becoming heavier anchors on your financial life.
- Pay Day Loans? Absolutely, positively NO! Go talk to a licensed insolvency professional before you do this.
- Surreal Paragraphs Found in Credit Card Bills, if you carry balances on your credit cards, you are in trouble. Look at their estimate for how long it will take to pay off the debt on minimum payments.
- A Mortgage Changes You, which is very accurate. When you get a mortgage, your life changes, and it will be a major element of your financial decision-making process.
- Make More by Reducing Debt with some elementary (maybe naive) arithmetic.
- Straight Talk on Your Money is not just a good book (and podcast). It explains how debt can get out of control quickly.
- Debt-shaming: Debt is Bad, but You Aren't having a poke at the "influencers" who say my commentaries about Debt being BAD is debt shaming.
- My coup de grace There is No Such Thing as good debt. Debt is a tool, like a chainsaw, and must be respected.
For me, it makes sense to have a few $K in an emergency fund while having a fat mortgage (like we do) that is being paid down over time. I believe emergency funds are essential. How much you need depends on the emergencies you want to survive.
Even though, incoming cash – outgoing cash = SAVINGS, which is happening in our case, you can remain in debt. Just over time, the debt should be less.
Everyone need smoney put aside as an emergency fund. Most people have an emergencysuch as the car breaks down, you then have a finacial emergency as you don’t have the money to pay to fix it so you use the debt carrier of a credit card. Enough of those and you have a maxed out credit card.
Save some money, and when that emergency comes along, pay cash! Replenish the emegency fund and carry on till the next one comes along. What sucks is when you have 3or 4 emergencies all in a row before you can replenish… been thru that and I am here on the other side of it all , with no emergency fund, but working on replenishing it.
I agree, but I always wonder about people who have large “rainy day” funds and also carry large Debts at the same time. Emergency funds are important (no argument) but is a paid off line of credit an emergency fund? Some might say yes, others would vehemently disagree, it’s an interesting debate.
My view is that it is not that simple.
Some forms of spending have future savings built into them because they represent an investment as well as consumption. Spending to build a business will increase your income and thereby ultimately increase your savings while spending at an expensive restaurant is all consumption.
That’s just my quick reaction to the question.
Rob
Yes.
You sure 😛 ?
I think the simpler you can make it the easier it will be to keep life in order in general. Saying that an emergency fund can be handy even if you do have debt so you don’t have to dig into more if any emergency does happen. I know theoretically it may save more to pay all your spare cash to debt in the long run but it’s about being comfortable with upsets too!
Agreed, it is what you are comfortable with in terms of living. If you can’t sleep without an emergency fund, then by all means have one, however, leaving money to do nothing, while you carry debt is always an interesting quandary too.