Tuesday, February 23, 2010

Are We Failing If We Don't Apply All of Our Savings to Debt Reduction?

Beks, at Blogging Away Debt has decided NOT to apply her $3000 tax refund to her debts. Instead, she will use it to accompany her family on a European vacation, possibly the last big trip the family will take together.

Note that she is NOT planning to accumulate more debt or to use her credit cards for the trip. The point is that her tax refund could be applied to her indebtedness, but won't be.

Single Guy would get this. He recently bought a new computer that he didn't need and couldn't wait to purchase. His situation is a tad more complicated in that he put the purchase on a new credit card with no interest, intending to pay in full by the time interest would kick in.

Beks has the money in hand. Single Guy--not so much.

As one might expect, Mr.Tough Money Love has more than a few harsh words for Single Guy. I don't know what he'd think about Beks, but since he reads and responds to this blog, I'm guessing we'll soon know.

My question is, is there a problem saving up for, or using available cash for a financial spree at the same time one is reducing debt?

Personally, I think not, at least not if it doesn't happen all the time. Things do come up--friends or family have weddings; once-in-a-lifetime trips appear on the horizon (witness Grace's trip to Japan in 2008); the plasma TV bites the dust during the Olympic hockey finals; whatever.

If one can come up with the funds WITHOUT incurring more debt, then I say, Go for it! It may lack Dave Ramsey's "gazelle intensity" but it is NOT the death knell for eventual financial success.

23 comments:

Karissa said...

Hi Grace :)
Totally depends on the situation. With me, the refund goes straight to debt repayment. I tell myself that the vacation/new computer/bigger, better TV will be more valuable to my household when my son is a bit bigger and can appreciate more. Currently he is almost-four, and a local trip is just as fun as one far away. By the time he is ten, I will be debt-free AND have savings so vacations will be on the priority list, for sure!

Morrison said...

There will always be opportunities and temptation to get you off your path. Why don't people recognize this? Beks has a plan to be debt free, yet she will blow a $6000 tax refund on a trip to Ireland & Italy, rather than either pay down her student loan or car loans.

I have always said it takes guts and courage to pay off your debts. I gave up a trip to Mexico so that I could use the $1500 to buy dirt fill for my new home contruction. I gave up a trip to Italy this year so that I could use the $1600 to put in new bamboo flooring in my kitchen and living room. I didn't go to Florida this winter because I wanted to use that money ($1000) to put in 2 more bedrooms and a full bath instead. So, I gave up $4100 worth of vacation to 'invest' in a property that now has been re-evaluated from $325K to $450K, an increase in net worth of $125,000. That's an increase of 3048%. That's right. I increased my money by three thousand forty eight percent right now. Naturally, when I sell a few years from now, I will probably quadruple that $125K and I could probably buy the whole country of Mexico, Italy and Florida combined.
Beks can reason all she wants about 'family' time or 'chance in a lifetime'. Unless one of her family members has terminal cancer, she is fooling herself.

This is why people who are in debt STAY in debt. She's right. She should take the trip now because she'll never, ever be able to afford to ever take another trip again in her lifetime. She'll always be financially strapped and in debt.

Give me a break.

Nicky @ Not My Mother said...

I agree with you, Grace. Of course, it depends on the circumstance but I don't think the gazelle like intensity is always necessary.

When I was living in the UK, I had GBP 35,000 to pay off. I threw a LOT of money at it. But, I didn't live all that frugally: I didn't cut out our cable TV or refuse to dine out or go on trips. The cable was because it didn't just affect me, it affected my not-in-debt partner, and the others were because dining out and travelling were part of the reason I was in London in the first place. So we both budgetted something like GBP 500 a month towards entertainment and travelling.

Sure, that money could have got me out of debt sooner. But I would have missed out on doing a lot of little weekend trips around the UK and Europe. I still got to my goal, it just took me a little longer and now I'm on the other side of the world I have a lot of wonderful travel memories as well as good finances.

You still have to have a life, especially if your debt repayment is going to take a long time.

frugal zeitgeist said...

Looking at Beks's situation, my answer would be that she's not spending $3000 on a European vacation. She's spending $3000 plus the additional interest she has to pay on her debt that she could have wiped out with that $3000 refund. The additional interest Beks has to pay on her debt is the opportunity cost of not applying her refund to paying the debt off sooner. What she should ask herself is not whether she can afford $3000 for a trip, but rather whether she can afford $3000 plus whatever her opportunity cost is, because that's really what she's going to be paying.

The question of whether Beks (or whoever) is failing by making this decision is kind of vague: Failing at what, exactly? Life? Creating memories with her family? Financial independence? For the first two, the answer is no; for the third, I'd call it a definite maybe. It's that opportunity cost thing again.

My take on credit card debt is that most of the time, people have it because they've already rewarded themselves with money they don't have. I personally find it hard to buy into the concept that it's good for people to go on rewarding themselves (even with unexpected windfalls) when they haven't paid off earlier rewards yet. If Beks doesn't have any credit card debt but is paying off school loans, a mortgage, or a car, I have a little more compassion for her decision on the grounds that she's not piling on reward after reward after reward. Even so, in her shoes I'd be throwing that money at the debt because I really believe that being debt-free is the biggest reward of all.

Just my $0.02.

Mr. ToughMoneyLove said...

If folks would once and for all focus their energy 100% on getting rid of their stupid consumer debt (and most of it is stupid), these issues would never come up. As I've told my kids 100 times or more, the pain of discipline is far less than the pain of regret. Europe isn't going anywhere. It will be there when Beks can afford to go. But she won't wait because she lacks the financial discipline. That's the path that most people start on and never deviate from. Something "always comes up."

Sasha said...

If the trip was only to be Beks and her husband I would say to leave it and pay off debt.

Because I am assuming it is an extended family trip I would go.

I am coming from the fact that I have lost both my parents from cancer. I had only found this out a week before he had died.

I would rather pay off more debt than miss an opportunity like what bek has.

I would give my right arm for it.

Anonymous said...

While I do think there needs to be a balance, I think Beks is an idiot. There is not one single part of me that is surprised at her decision to blow 6K on a trip to Europe on the heels of her husband's unemployment. I'm sure Beks isn't "planning" on incurring anymore debt with this trip ... but she IS going to spend more than 3K per person on the trip.

Living a little is one thing, spending 6K on a trip when you are broke and were worrying about losing your home 6 months ago is just dumb.

Florence said...

Some people have a higher tolerance for debt than I do. I wanted food, shelter, and necessities until I could get out of debt. It is hard enough to get out from under debt without dragging it on and on. IMHO

Revanche said...

I'm in agreement with Frugal Zeitgeist: she's opting to use that cash for a vacation so then she's opting to carry the equivalent in debt for however much longer it takes her to earn that amount of money to put towards debt reduction.

She's already had her cake, in terms of running up that debt, using money for vacation instead of debt reduction is just prolonging the pain of carrying the debt.

I'm of the mindset that once in a lifetime events come up all the time, they're just not all the same. IF you're serious about eliminating debt from your life, then sacrificing those events until you're solvent has to be the commitment you make.

But to each their own priority. I've certainly made the difficult, or selfish, or frustrating call time and again and wouldn't say I always made the right one.

DogAteMyFinances said...

Idn't that cute? So easy to criticize others when you've never made a single mistake. I've made bigger mistakes than a stupid computer, for sure.

Now as for, Beks, well. You'd think dire, extremely stressful unemployment would smack something into you, but I guess not.

Anonymous said...

I want to know how Morrison got two bedrooms and a full bath for $1,000.

Dawn said...

I think it is just as easy to throw stones at other people as it is to justify pretty much anything to yourself. When you write about your own financial choices and your struggles, it puts these (very human) decisions on display for everyone to judge.

I'm with Karissa, I think it depends on the situation and the person involved. I've been in both situations - I have turned down wonderful opportunities because I was taking care of debt, and I have made purchases when I could have used that money to pay off debt.

Anonymous said...

Morrison put the $1,000 toward finishing the upstairs of her house. The renovation and the total cost are discussed on her blog.

All you folks should be posting your comments on the offender's blog. Beks has an appalling number of cheerleaders, and some of the responses show what is really wrong with this society's attitudes about debt and entitlement.

Here's a person that was eating ramen and worrying about how to pay the bills at the end of 2009. Now she is suddenly free to blow $6,000 plus on a trip to Europe. Her rationalization that appears in the comments is ridiculous.

She claims to be following the Dave Ramsey plan. I'd like to see her call in to one of his shows and ask what he thinks of her plan.

Morrison said...

Anon,
Thanks for your comments on my blog.

The $1000 was put TOWARDS the 2 bedrooms and a full bathroom. Unless I was building a Barbie Dream Home, $1000 is moot. But instead of going to Florida this winter (I was spending $1000 for a 2 week rental plus whatever other costs I would have incurred) I decided to put the money towards a home remodel I currently have going on. Here's the link (with the dollar amounts I've spent so far):

http://dreamhousesdocometrue.blogspot.com/

Nicole said...

I paid my dues getting rid of all of my debt over the course of a few years so that I would never have to be in the situation where I had to choose between a trip to Europe and paying off debt again. Once you have compound interest working for you in the correct direction rather than against you and you've figured out "enough" you have so much more money, so much more freedom to do the things that you want to do.

So I didn't read Beks example, but from your summary I think it's ridiculous. Pay down your high interest debt (especially on things that don't appreciate in value), put money into savings. Then you can take trips to Europe guilt-free later.

I've noticed that with some people we know, there's a desire to keep in debt a little and to not have a whole lot of savings, because any time there's an excess of savings all of a sudden an "emergency" comes up with a friend or relative who will never pay the person back. It's so much easier to say, "I'm broke" than to just say no. I wonder if that's what's going on in this case. That tax refund must be spent because if it hangs around, it'll just go to someone else and Beks won't get any fun from it herself.

We need to set the bar higher on what "broke" means and take care of ourselves first. Get rid of the debt, put money away for retirement where it cannot be touched. Make sure the emergency fund is untouched for any but personal emergencies. Save for a European trip in a place that can't be tapped into. Then you can still, in good conscience, say you don't have the money. Pay yourself first.

When you have high interest debt you don't really have savings-- you just have cash that you're thinking about separately. But it isn't really separate. So no, it isn't a paid for vacation. She's paying it with interest.

Gazelle-like intensity is only temporary. You do it so that you never ever have to worry about money again. I'm glad I put in my dues and I am glad that I will never (God, nature, and health insurance willing) have to do that again. I get to call the shots and I don't have to worry about Murphy camping at my door. It took a lot of sacrifice, but it was completely worth it.

Stephen @ ACE Financial Services said...

If I'm on Beks' shoes, I will fight the temptation to spend those several grand for a vacation. There will always be a time for that after she will settle the debt.

I am more inclined to Morrison's last paragraph. Changing a spending habit is quite hard, but you've got to do it if you want to be free from debt.

Anonymous said...

Wow - This is more of the response I expected on my blog! ; )

Like I said, I know I'm disappointing a lot of people by going but I don't think this decision will leave me eternally in debt. I'm still set to pay off all my debt by the end of the year and I don't feel any regrets about not paying it off four months sooner.

Thanks for the mention Grace!

~Beks and Blogging Away Debt

MasterPo said...

Saving or investing your tax refund is one thing.

Blowing it on a vacation is another and not a smart move in MasterPo's opinion.

As for debt vs. savings, paying down with every available dollar sounds great on paper but you need a cash reserve too. Especially these days (and probably even more in the coming months!!)

With that said, it's also about cashflow. Sure applying it to debt sounds good but sometimes it's better to pay a little more in the long run (by way of interest payments) and have a more steady cash flow.

Anonymous said...

Anonymous has left a new comment on your post "Are We Failing If We Don't Apply All of Our Saving...":

Wow - This is more of the response I expected on my blog! ; )

Like I said, I know I'm disappointing a lot of people by going but I don't think this decision will leave me eternally in debt. I'm still set to pay off all my debt by the end of the year and I don't feel any regrets about not paying it off four months sooner.

Thanks for the mention Grace!

~Beks and Blogging Away Debt

Anonymous said...

MasterPo has left a new comment on your post "Are We Failing If We Don't Apply All of Our Saving...":

Saving or investing your tax refund is one thing.

Blowing it on a vacation is another and not a smart move in MasterPo's opinion.

As for debt vs. savings, paying down with every available dollar sounds great on paper but you need a cash reserve too. Especially these days (and probably even more in the coming months!!)

With that said, it's also about cashflow. Sure applying it to debt sounds good but sometimes it's better to pay a little more in the long run (by way of interest payments) and have a more steady cash flow.

Anonymous said...

It is always going to be SOMETHING. At some point if you want to change things around so that you are financially secure, you're going to have to make a sacrifice. If not at this point then at some other point. If sacrifices were made before, then there wouldn't be any problem with going this time.

Did it MY way said...

Debt equals handcuffs. Debt free equals Freedom. Pay cash or do with out. End of story. Sure works for me.

See Ya

Petunia said...

SingleGuy has no debt other than his mortgage and also has a large savings account. If he finances a computer at 0%, so what?

I haven't read Blogging Away Debt, but from the comments here the 6k vacation sounds like a very bad idea. Hope this decision doesn't come back to bite the blogger on her backside.