Losing Job in 1 Year - Pay Off Loan or Add to Savings?

Hi everyone,

Recently, I learned that my job will be offshored to India in September 2010 (boo!) I intend to have my small amount off credit card debt paid off by then, but am trying to figure out how best to portion out my other money. I have 4 months worth of savings, as well as a student loan that has a 9% interest rate. I can pay off the student loan before my job disappears, but would it make more sense to sock the money away as savings? If my job was stable, I would be putting my usual $200 a month into savings and throwing the rest at the loan, but now I'm not sure if a new approach is warranted.

Thanks for your help!

I know it sounds bad that you will lose your job but you have nearly a year of warning. Most people get a few weeks or less.

I would err on the side of flexibility normally. That would mean not paying off the loan and keeping as much as you can in cash. HOWEVER...your student loan rate is fairly high so it would be very attractive to get rid of it if you can.

You need to make a realistic assessment of how long you will be out of work. We know you hope to get a new job quickly. But what do you really think will happen? Take your worst realistic estimate and plan to be without an income for that long. ( don't plan for teh scariest case...maybe 10 years of nemployment...plan for what you really think before you would take any job).

Once you have done that then try to sock away as much cash as you can while simultaneously reducing the cash you need by being frugal and also paying off debt.

wow, 9%? That is a really high rate. Call around and see if you can get that lowered.

Hi there,

I'm sorry to hear that you will be losing your job. But as mentioned, the bright side is you have some time to prepare.

If I were in your shoes, I would personally put everything into savings. The student loan interest rate IS pretty high so it can be tempting to pay it off right away, BUT as rhino mentioned you will most likely be able to get that lowered. Also if you really had to, you can defer payments while you are unemployed.

I think this approach makes sense because if it takes you longer than 4 months to find another job, then you will have more savings to keep you going and you won't have to resort to borrowing money to get by. On the other hand, if you take less than 4 months to find another job, then all that money that you were dumping into savings would now be freed up and you can use that money to pay off your loan all at once.

Good luck!

_________________
Michael David
Minting Pennies

www.mintingpennies.com
Making Change Two Cents At A Time
Personal Finance, Investing, and Microfinance

You have almost a year, both to save up and to start looking for a new job to replace the one you're losing.
I would suggest saving more than you would if you weren't losing your job, but still paying off some of the student loan. You have 4 months of savings now, but in a year, you should have way more than that, so if you start looking early enough you can probably have enough saved to find another job.

I would still try and get that interest rate lowered if you can.

I would save. How likely is it that you can get another job? Do you get a bonus for completing the full year? Start looking for somewhere else now, instead of waiting for that shoe to drop.

I would definitely pretend that I had already been fired in terms of the intensity of your job search. If I could get out of there next month, I would. That is not going to be a fun place to work in 6 months.

I agree with kaitlyn, start looking for a new job now, and hopefully by fall 2010, you'll have a new job, and can divvy (sp?) up your money accordingly.

True, your student loan interest rate is high. I would try to decrease that too if I could, but you need cash in case you have to move for a new job. I would save the cash, and pay the minimum on your student loan.

pay off the debt now. you have a year to look for a new job. you can always apply to mcdonald's or something to make the rent. better to be able to get a low income job and have no debt, than to have debt and have to pay rent with little savings. you also take away a big stress point by getting rid of the debt, and get rid of one problem that you do not want to deal with while you are trying to find another job, etc. bottom line: minimize the issues you will have to deal with at the same time.

Keep the loan but try to get a lower rate. Seems like a very high rate for student loans. Nobody lending you money is going to know that you are losing your job so take advantage of that very generous 1 year window and prep yourself. If there is one rule that beats all others in business or personally, it is that cash is king. As long as you don't run out of it, you can get by but as soon as you do, everything goes downhill fast.

The reality is that millions of skilled jobs are going to head to China and India and other low cost countries over the next few years. It isn't going to just be manufacturing or programmers any more. So I would have a 6 month to a year reserve at minimum built up if you think that your job is the kind that may be moved overseas. And let me say unless you are in sales, HR, or healthcare, education, or government, you're job is probably going to be under outsource stress. I used to have many $100K plus programmers working for me and there is no way that I would be paying that kind of money today except for the best of them. Not sure your line of work, but a 1 year notice usually indicates professional.

I'd be putting more than $200 a way a month too. It may be tough but having a big bank account in these times lets you sleep at night. Try 15-20% of your income.

_________________
LiveCheap.com Live the Good Life....Cheaply