Too Carried Away When Paying Off Debt?

For those with an optimistic nature, it is only natural to look for silver linings in times of trouble. In the personal finance world, that silver lining happens to be the fact that more Americans are paying off debt. Indeed, Frugal Dad reports on a survey conducted by Credit Karma that shows that Americans are paying off more debt than they are accumulating right now. For now, it appears that consumers, on average have a debt picture that looks like this:

• $6,818 in credit card debt
• $193,036 in home mortgage loans
• $52,559 in home equity loans
• $14,449 in auto loans
• $26,368 in student loans

I don’t have as much in most of those categories. I have less in mortgage loans, no home equity loans and less in auto loans. I have more in student loans. Grad school will do that to you…

Anyway, it has me thinking. Paying off debt is a good thing, but in uncertain times like these, it is important to remember that it is possible to get too into paying down debt. You should not pay down debt aggressively at the expense of an emergency fund. We ended up with some unexpected expenses this summer, and if we had put all of our extra money into paying off debt, we would have had to…wrack up more debt in order to cover the emergencies. By taking a measured approach, we were able to reduce our overall debt, while still setting money aside.

The way we decided to address the savings vs. pay down debt issue was to take our extra money each month, and put half toward debt repayment and half toward building up savings. After this month, though, I will feel comfortable (now that our yard has been paid for — without using debt) adjusting our pay down debt amount to 75% of our extra money and putting 25% toward savings.

In the end, it’s about assessing your individual personal finance needs and determining what will work best for you. But don’t get so carried away with paying down your debt that you forget that sometimes other things come up. Create an overall financial plan that accounts for these issues.

Image source: Daylife