This is a question I encountered in the past and one that has come up for me again since I’ve started looking at my cash flow. The question is a very valid one if you’re far enough into debt that the money you save each month would actually make a difference to your debt. My cash flow is completely off balance at the moment and I was contemplating stopping setting aside the $100 every month in an effort to bring this back into balance. But it got me thinking about the benefits of trying to save money versus keeping cash flow down and paying off debt. Both sides of the argument have their benefits.
Benefits of Saving Money
I was trying to come up with a list of benefits that setting aside that extra money could bring, here’s what I came up with:
- You have a growing nest egg
- The money gains interest as it grows
- Gives you the confidence of having an emergency fund
- Depending on where you save money it’s less accessible than credit
Benefits of Paying Down Debt
Conversely I also came up with a list of plusses to paying down the debt instead of putting the money to savings
- The $100/mo should go onto credit cards which can be used in the event of a real emergency
- Will help brining cash flow in balance down – increasing the likelihood of my not using credit cards
- Paid down debt means that interest is lowered over time
- Credit card interest is much higher than any savings interest, the difference is you’re loosing money
Risks to Keeping Cash Flow High
Unfortunately there are some additional risks if I were to keep my cash flow out of balance, which really made me think twice about keeping monthly savings going even by the $100/month.
- I might have to fall back on credit cards if I’m completely out of money (in an effort to keep the savings alone)
- The savings might be too inaccessible in the event of a real emergency – if you pay down your credit card debt you have this as a fall back in the worst case scenario
- The cost of interest on the cards doesn’t come close to matching savings growth
I’m essentially looking at this from a black and white point of view, do I keep the $100 going to savings or to reduce my cash flow in an effort to keep my debt down. Personally this isn’t a question of if I put the extra $100 onto my credit cards but if I should keep it going into savings. One of my readers, David Hunter, left a comment suggesting a slightly different idea which was to cut back all luxury spending for 3 months to pay down the debt but to keep the savings going. Its an interesting idea in that dropping all luxury spending would bring my cash flow back into balance and pay down the debt some more. The unfortunately thing is that if I were to attempt this I’m sure it would fail and I would cave into some of my vices. I’ve started cutting back on these luxuries but to the point that I’m still enjoying them but I’m not bleeding out money for them. Take going out for example, between my wife and I we’ve stopped going out a couple times a week to maybe once and when we go out we keep it simple and look at costs.
I like the idea of going cold turkey on pretty much all-extra expenses but I also want to be realistic, I don’t want to slip in a fit of frustration, which might cost me more money. Its very similar to a person on a stringent diet who caves eating their favorite foods in a time of stress. I want to slowly reduce the luxury expenses so it’s not a shock and I find a nice balancing point between still enjoying the frivolous things in life from time to time.
Another option was to increase my income. I’ve started pulling together some ideas and plans for creating some passive income but these are still plans and ideas that haven’t been put into action. So the only other way to do this would be to change jobs, which I’m not willing to consider at the moment.
The Net Result?
For the next month I’m going to reduce as many of the luxury expenses as I can without feeling like I’m giving up too much. I want to see how much I can reduce while keeping my lifestyle somewhat similar. If it turns out I can bring my cash flow close to balancing then I’ll keep the savings going and further concentrate on cutting other costs. If it doesn’t work then the extra $100 per month will stop flowing towards savings; my cash flow needs to balance or I’m living beyond my means.
[tags]savings, cash flow, debt, luxury expenses[/tags]