payoff debt or save

So, is it better to pay off your debt or save money?

By the end of this post, you’ll know exactly whether or not you should pay off debt or save for retirement.

Having the right strategy of paying off debt vs saving will put you in the best financial situation in the long run.

Carla* (name changed for privacy) wrote into us asking if she should pay off her debt or save for retirement.

Carla’s financial situation:

  • $3,000 at 20%, $4,000 at 16% on credit cards
  • $12,000 car loan at 2%
  • $30,000 student loan balance at 9% interest
  • $120,000 balance on mortgage at 3%
  • Take home pay- $4,000 per month
  • Currently has no emergency fund saved
  • 401k company matches dollar for dollar on first 2%
  • So far she hasn’t been contributing to her 401k

The questions she has are:

Should she be investing in her 401k?

Which debt should she pay off first?

When to save up an emergency fund?

Should she pay her home off early?

Should she pay her car off early?

There’s a lot of differing advice out there.

People say you should save $1000 in an emergency fund even before you start tackling your debt.

Some say to pay off the highest balance of your debt first. Other people say she should pay off her highest interest rate debt first. Should she be saving in her 401k or not?

Here’s our answers to her burning questions:

Should she be investing in her 401k?

Yes, up to the match her company long as she can make her minimum monthly payments on her debt.

By investing up to the match, she essentially gets a 100% return on her money, which is unseen anywhere. But we wouldn't recommend she put any more other than the amount required to meet the match.

I wouldn't recommend Carla to put money into her 401k at all though if it was going to cause her to have late payments on her credit cards. 

Having missed payments on credit cards comes with late fees. It also hurts your credit, which could hurt refinancing her student loans down the road.

We are definitely going to encourage her to reduce her expenses as much as possible and try to increase her income in any way she can. Whether that’s picking up big economy work or something on the side.

Just something that’ll help widen that gap between her expenses and her income. Once that gap has been widened, she’ll be able to make her minimum payments and contribute to the 401K simultaneously.

Which debt should she pay off first?

Our method is not the Snowball method, it’s not the Tsunami method, it’s the Tornado method which is the fastest way to pay off debt.

In our Tornado method we recommend paying off the highest interest rate debt first. For Carla, that would be her credit card with 20%, then she would go for her second credit card at 16%, and then she would go for those student loans.

Methods like the Snowball method work because it’s a psychological trick you play on your mind.  We try to address the psychology behind money first and then go into the most mathematically optimal way.

This is the way we recommend doing it in our Own Your Debt course. In the course, we have an entire module on mindset because getting your money mindset and understanding your past habits and patterns around money will enable you to be successful at the most mathematically optimal method.

Should she save up an emergency fund?

No, not until her credit card debt is paid off. We know this advice is kind of counter to a lot of advice out there and we’ll explain why, but first, we need to talk a little bit about types of credit, revolving versus installment.

Revolving credit is credit cards, personal loans, things that you pay on every month but can also take money back out every month.

Installment credit is more like your amortization on your house or your student loans. You have a payment every month that will pay this debt down in 30 years and once you make that payment, you can’t just be like hey mortgage company, can I have that 500 bucks back this month I need to pay for something.

The reason we make that distinction between revolving and installment debt is that revolving credit typically has the highest interest rate because it’s usually not secured against anything like your home.

When you have high-interest rate debt and are trying to save money in an emergency fund you’re basically charging yourself interest on that balance that’s on the credit card.

We recommend paying more on your credit cards with this money you have in your emergency fund, so you could save yourself that interest. When you have it in a bank account it’s sitting there earning hardly anything, maybe 1-2%.

We recommend if you have revolving credit, you should NOT save an emergency fund and that you should put that money towards your credit card and save yourself the interest.

If you have an emergency come up, an unexpected expense, you can always get some of that money back out by using that credit card as that emergency fund while you still have credit card debt.

Now, we make a very clear cut there because you don’t want to be taking money off the credit card to pay for unexpected expenses when you’re done with credit card debt and your currently working towards paying off installment debt or a lower interest rate debt.

So in Carla’s specific situation, I would say pay your 20% credit card, pay your 16% credit card without having an emergency fund. After that point establish an emergency fund and then start paying on your student loans, because at that point you don’t want to go into credit card debt because you’re putting money on your 9% student loans.

The way to think about it is you never want to loan money at a higher interest rate to pay money at a lower interest rate,

which is basically what you’re doing if you’re holding an emergency fund while you’re paying 20% interest on a credit card.

On that emergency fund, you're earning 1%, maybe, but you’re paying 20% over on the credit card, so you might as well take the emergency fund and use it to pay the credit card off. Then if you have an emergency come up you can borrow money from the credit card.

That way, you’ve got yourself into this break-even interest rate situation instead of this big discrepancy between bank account and credit card.

But once you've paid off all your credit cards (revolving debt) and are working on your installment debt, it makes sense to build an emergency fund.

Why? Because you can’t take money back off installment debt, so once I put money into the student loan at 9 %, I can’t borrow it back at 9%. After that I'd have to go to the 16% credit card and borrow it, so now you’re in a better situation to have this discrepancy between 9% and 1% of your emergency fund.

Your emergency fund is the buffer keeping you out of 16% credit card debt, so that’s the way I like to think about this interest rate arbitrage which is the way to pay off your debt the fastest and also save yourself the most interest payments along the way.

Should she pay her home off early?

Depends on her risk tolerance. If she doesn’t tolerate risk well, then yes. If she would rather invest in the stock market, that money historically returns 7%, so she would be making more money by investing but it won’t be a straight line like paying off her mortgage would.

Her mortgage was 3-3.5%,  which is pretty low and at that point you start asking the question of whether you should be investing in the stock market or something else instead of paying off your house.

We have the personal opinion that you should invest it at that point instead of paying off your house early just because you have really low interest rate. But this is definitely going to depend on it each individual because it comes down to your risk tolerance.

The stock markets returns 7%-ish historically over the long run. When you look back though, that’s not a straight line, it’s very up, very down.

Over a 30 year period you might earn 7% while investing, but your house is a guaranteed 4% return. Some people are more comfortable with taking that guaranteed return on their money by paying off the mortgage early.

It’s all personal. If seeing the ups and downs of the stock markets really stress you out and you don’t like that, yeah, go for it, pay off your mortgage early.

It can be a really good feeling to be debt-free and if you paid off your house, you don’t have that obligation anymore, you don’t have a mortgage payment, expenses are more manageable so that can have a really freeing effect on your mentality and just kind of your financial security, so definitely some benefits are there to consider.

Should she pay her car off early?

Similar to paying off a home, 2% is a really low return on your money. We'd recommend consider selling the car and buying a cheaper one so you could get cheaper insurance and maintenance costs. You'd also not have a car payment, which would loosen up her expenses. If nothing else, definitely keep this car after its paid off for as long as you can.

Leave us a comment about any advice you have for Carla’s situation

If you have a situation you need advice on, leave em in the comments or send us an email hello @ 

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Written by Alli

This post is all about the fastest way to pay off your credit cards using our Debt Tornado strategy. If you are confused about what the different strategies are, click our post on the Snowball, the Avalanche, the Tsunami and be introduced to our Tornado.

Scroll to the bottom if you'd rather watch a video.

So now we’re diving deep and showing you exactly how the Tornado works and how it is the fastest way to pay off credit cards.

Guess how much faster you can pay off your debt using the Debt Tornado than using the Debt Snowball?

You can pay off your credit card debts up to 20% faster and up to one year faster with the Debt Tornado method!

So let’s meet Debbie, a fictional character we made up to help explain the concept. She recently joined our Own Your Debt program and has $40,000 dollars in credit card debt spread across 5 different cards all with different balances and different rates.

She’s just like your typical American.

Debbie's Credit Card Situation

She has 5 different credit cards and they all have different balances on them and they all have different interest rates and the total amount of debt she has is about $40,000 dollars. Her average interest rate is about 21% which is fairly typical, 27% is high for like your travel rewards credit cards, 12% is on the lower end like connected to your bank account normally or something like that. Her minimal payments all add up to be about $1,130 dollars per month, which is a lot, it’s like a mortgage payment.

Debbie’s Income

After she pays for all of her housing and food, all of her needs, she has an another $1200 dollars leftover that’s going to go towards this debt.

As you can see that’s not much more than her minimum payment, really.

Caveat: A lot of people are in this situation where they're really just pressed to the limit as far as what their creditors demand to them for payments and what they can make. Definitely the biggest thing to start with is to try to distance that gap between your income and your expenses so you have more and more money to put towards your debt, it’s going to help you eliminate a lot faster, but we really use Debbie as this example so you can see how the strategy plays out for her.

Debbie came to us not really knowing what to do, she had a lot of questions like: Should she focus on building an emergency fund? A lot of people recommend building $1,000 dollar emergency funds even before you start tackling your credit card debt. She wonders if she should follow the Snowball method and pay off the smallest balance first as that what's a lot of people recommend too, and a lot of people have had success doing that too. She also wonders what she should do if an unexpected expense comes up, if she doesn’t have an emergency fund.

Debbie feels overwhelmed and out of control when it comes to her credit card debt which is absolutely understandable. There are a lot of people in the same place especially if you have $40,000 dollars’ worth of credit card debt and you're paying almost $1200 dollars a month towards your payments. It can seem really overwhelming and really hard to know what to do, where to start, and how to tackle it most efficiently.

So thankfully, Debbie joined our program and she now has a step-by-step guide to tackle her debt. We’re going to show you our recommendations for her so you can get preview of how you can apply our strategies to your personal situation.

Debbie's Timeline to Debt Freedom

So here you can see Debbie’s timeline to debt freedom

She joined the course in November 2018 and that’s when we put this projection together. You can see if she used the Debt Snowball method with a $1,000 emergency fund, she would pay off her debt in November of 2023. If she used the Debt Avalanche method with a $1,000 dollar emergency fund, she would pay off her debt about 3 months earlier, in August of 2023.

Using the Debt Tornado strategy, she would be able to pay off her debt in March of 2023, which is almost 6 months earlier that the debt Avalanche method and 9 months earlier than the Snowball method.

So how much money does Debbie save doing the Debt Tornado method?

Debbie would save almost $8,450 dollars in interest payments by using the Tornado method.

Imagine what you would do with an extra $8,400 or $8,500 dollars sitting in your bank account. You could take a trip to Europe. You could invest it!

You could do a lot of cool stuff!

So, how does this Debt Tornado work? And why does it pay off your credit cards the fastest?

Using the Debt Tornado method, Debbie pays down her debt by highest interest rate first. The Debt Tornado is basically a little tweak on the Debt Avalanche strategy. The biggest tweak is that she does not keep an emergency fund. I know a lot of you are throwing some red flags as you’ve been taught that you need to have to have an emergency fund to keep you out of going back into credit card debt.

But here is the situation: you're already in credit card debt! So by keeping this money in a savings account, you're actually causing yourself to pay more in interest than you would if you put this towards your debt immediately and started tackling that top interest rate debt from day one.

Without an emergency fund, people will ask what happens when we have an unexpected expense. So in Debbie’s case we estimated that she would have $1,000 dollars unexpected expense every 6 months that would account for some of those random unexpected expenses.

What would Debbie do when an unexpected expense came up? Debbie would put that expense on her lowest interest rate credit card.

Why we think that emergency funds are pointless when you have credit card debt

With a $1,000 dollars sitting in a savings account, how much interest are you earning on that money, maybe 1%, 2%?

2% if you’re lucky and are in a high interest rate savings account.

So, you're not earning much money on that $1,000 dollars. But meanwhile, your credit card balance is racking up interest at over 20%.

If you put that $1,000 dollars to work on your credit card debt, you'll be making more money in the long run.

Think of it this way: by putting that money towards your credit cards, you're saving yourself that 20% interest that you're paying on that credit card balance.

So, why do so many people recommend the Snowball method of paying down debt when the Tornado is clearly more advantageous?

That’s because paying down debt is exhausting and you will have unexpected expenses come up that make you feel like you're derailed and off-track and make you want to give up on your debt pay down game.

So, psychologically, if you have that emergency fund it helps people to feel like “okay I'm not derailed, I have this, I've prepared for this, I've planned for this,” which makes sense.

Given that it’s obvious that so many people suffer from paydown fatigue while paying down debt and feel like they're overwhelmed and get off course, how do we at Owen Your Future prevent debt pay down fatigue while following the strategy that makes the most sense mathematically?

A few things: we really stress community, accountability and identifying unconscious money habits.

In the first part of our course or the first thing we do with any coaching clients is it really try to tackle how you relate to money, how you think about money and dig up any past traumas or any past money experiences that can impact you negatively. The community aspect is there to support you and keep you going, keep you motivated, inspired by people sharing their wins, encouraged by people sharing their failures and struggles. It really helps everyone understand that there are other people going through the same thing you are, we are in it together and by working together and supporting each other we can get to the other side.


So if you're ready to Own Your Debt and tackle the Tornado method strategically and with care and confidence, you can schedule a call, talk to us, we’ll see how we can help you best, whether that’s coaching or courses. But just so you know, our free material is always going to be available, so wherever you are at your journey we have something for you.

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