This article is by staff writer Honey Smith.

An issue was raised in the comments of my recent post, Celebrating One Year of Homeownership. In that post, I mentioned that we currently have over $30,000 in liquid savings. At least one reader felt that, with our level of debt (currently over $390,000), that this was an excessive amount and instead we should pay down some of our debt. So I thought that this was a good situation to weigh the eternal savings-or-debt debate again using my own situation as case study.

First, some updates and future plans

  • The shed: We had the old shed demolished and removed and the new shed assembled, which cost about $500.

  • The back deck: We also got an estimate on the back deck. The issues there are that the paving is cracked throughout and, in certain places, the edge of the pool is crumbling, well, into the pool.

  • The handrail: The quote we received was to resurface the entire back deck, to address the structural issues along the edge, and to install a handrail in the steps into the shallow end of the pool.

That quote came back in the neighborhood of $7,500. This seems like a lot to us, so we are going to get another quote as well as ask some questions about this one. For example, the estimate lumps some things together that I think could be broken out if we wanted to do a less extensive repair.

In other words, we want to know how much it would cost if we focused exclusively on the structural/safety issues and postponed the more cosmetic repairs for sometime down the road. We do need to at least get the crumbling portion fixed and I would feel a lot safer getting in and out of the pool if we had a handrail.

The argument for saving

The recommended size of an emergency fund varies, but between three to 12 months is the usual range given (that I have seen, anyway). The amount you choose depends on your monthly commitments, debt level, and tolerance for risk.

I estimate that our monthly expenses (excluding debt payments) total $3,000 per month. Now, some of this includes expenses like cable that could easily be trimmed if needed so the total would be $2,500 per month.

My student loan debt

I currently pay $1,000 per month toward my student loan debt. This is more than twice the minimum (which is currently $400). I direct everything in excess of the minimum toward my smallest balance. (Although my loan is a federal consolidated loan and everything is at one interest rate, I have two sub-balances — an unsubsidized balance and a subsidized balance.)

Jake’s student loan debt

Jake is currently paying $1,500 per month toward his student loan debt, also essentially twice his minimum. He has five different balances with different servicers, at a variety of interest rates, and he directs the amounts in excess of the minimum toward the highest interest loan.

Our savings options

So our current total expenses are $5,500 per month, though we could cut that significantly if we had to. (In addition to cutting things like cable, we could only pay the minimum on our debts.)

Amusingly to me, now that we have made so much headway on our debt and our income, Jake has become very risk-averse, and would like us to have 12 months’ of expenses in an online savings account. This means that he’d feel more comfortable with approximately $50,000 in the bank. While it turns out I have a little more tolerance for risk than he does and feel like that’s too much emergency fund, in a marriage these decisions need to be made jointly.

The argument for paying down debt

The benefits for paying down debt should be fairly obvious, but I’ll try to articulate them here. The biggest benefit is that the fewer debts you have, the less money you need to live. Using some of our money to pay off some debt means that, instead of needing $5,500 per month to live, we could get by with less. If we were able to pay off all our debt, I imagine that $1,500 would be more than enough, and anything else would be living high on the hog. Exciting stuff!

Our debt options

However, all debt repayments aren’t created equal. There’s the debt snowball method, which involves paying off your smallest balance first. There’s the debt avalanche, which involves paying toward the highest interest rate debt first. The former means that you pay off small debts completely faster, thus freeing up money previously allocated to a monthly payment. The latter means that you pay the least amount in interest over the life of your loans.

My student loans and my mortgage are at nearly identical rates (4.5% on one, 4.6% on the other) so the debt avalanche doesn’t really apply to my situation. This is fine with me because the debt snowball appeals more to my psyche anyway — important when it comes to staying motivated and paying off such large balances. I like the idea of creating additional flexibility in my monthly budget.

Creating flexibility requires a down payment

My student loans are on a graduated plan, which means the monthly payment increases every two years or after two years’ worth of repayments, whichever comes first. This means that with every extra payment I make, I am actually buying myself less flexibility because my payment increase will happen sooner. This continues unless I pay off one of the sub-balances completely.

While I have a traditional mortgage and not a graduated or balloon-payment mortgage, my mortgage is similar to my student loans. How? In that making an extra payment may reduce my total debt but doesn’t reduce my monthly commitments or create any flexibility in my monthly budget. Unlike student loans, however, where refinancing isn’t possible, I can refinance my mortgage.

The goal — eliminate PMI to create flexibility

So that’s the current plan. While we are paying more than the minimum on both our student loans and on our mortgage, we’re diverting a significant percentage of our income to save for a down payment fast so that we can refinance the mortgage, hopefully before the end of the year. The goal is to pay down enough of the mortgage to get rid of PMI and still have enough savings left over to have a three-month emergency fund after the refinance. This is another reason we decided to put off a total resurfacing of our deck — the cost of that repair/upgrade is too significant a percentage of the total we need to refinance.

Have you been in a situation where you had to choose between several, equally valid financial paths? What did you do? Share your story in the comments below!

(Editor’s note: Honey Smith’s situation lends itself to all sorts of interesting discussions. If you can lay out a different direction for Honey and Jake to pursue in your comments, we may use it as the basis for further articles on the subject of debt versus saving. You can also reach out to me via email at to offer your suggestions.)

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