Apr 22, 2011 58 comments

Springy Debt instead of a Cash Cushion

Q: Mr. Money Mustache,

I was curious where you stood on the subject of building up a 6 month savings cushion versus flinging money at existing debt? I know what Dave Ramsay says, but I also value Mr. Money Mustache’s experienced opinion. Thanks!

A: SOME sort of cushion, or ‘stash as we refer to it here, is essential to keep your life smooth even in the event of losing a job or having a big unexpected expense. But it is a huge waste of money to keep money in the bank earning no interest, while paying higher interest on debts.

The solution I like to use is “springy debt”. That is, debt that you can pay off or withdraw from, at will. A credit card is one form of springy debt. A mortgage, on the other hand, is one-way debt, since you can pay extra on the principal, but never suck money back out when needed.

I always set up a line of credit on whatever house I’m living in, and keep its balance at zero whenever possible. And I keep very little money in real cash in the bank – just a few thousand dollars, enough to cover a month or so of spending. Credit cards are automatically paid in full from this account, so it has to safely cover that without going into the red.

Any unpredictable expenses that aren’t covered by the bank account can now come straight out of the line of credit! Most people can qualify for a line of credit big enough for quite a few months of emergency expenses.

Some fancy bank accounts even let you connect a line of credit directly to your bank account. This is even more convenient, as long as the interest rate is still close to the prime rate.

If people currently have unpaid credit card debt, this is much more of an emergency. You DEFINITELY don’t want a cash cushion in this case, because the credit card is already an expensive cash cushion running in the negative. In this case, I’d keep paying off the credit card, and if possible get a line of credit on your house to pay off the credit cards, and then pay the line of credit down to increase your safety margin. And of course, cut spending drastically since unpaid credit cards mean you are walking very close to the edge of a steep cliff!

There will be lots of more detailed posts on dealing with debt in the future, since a lot of Junior Mustaches might be starting out with uncomfortable levels of the stuff.

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Mr. Mustache's #1 Fan April 22, 2011, 11:11 am

Am I getting ahead of myself to ask where Mr. Mustache is “stashing” the bulk of his money then? This junior mustache has no credit card debt or car loans. Just a mortgage, equity line, and six figure student loans. Oh and a husband (with a worst case scenario mentality) who is adamant that a 6 month “stash” is necessary before anything else. I kinda think the home equity line should go first, even before replacing the car. Either way, we are currently doing a thorough (and painstaking) review of our finances to see where we are spending our money and because I need to know exactly what 6 months of expenses amount to.

Reply
- MMM April 24, 2011, 12:17 pm
  
  Hi #1.
  I’ll answer your second question first: It is great that you have already established a home equity line of credit. Is it already maxed out? Or is there room on it for more withdrawals as needed? Either way, this would work great as your emergency ‘stash. Just pay it down using any and all available money and that is increasing your safety cushion, while simultaneously increasing your monthly free cash since your interest costs go down as you pay it off. You’ll be slowing down the backwards-moving conveyor belt that is currently fighting your efforts.
  
  As for the student loan – is it at a higher interest rate than the line of credit? If so, you’d probably want to put extra payments towards that once you get your line of credit paid off to a safe level.
  
  So I see no value in having any real cash savings beyond that available for the line of credit. It’s like saving up rainwater for future firefighting when there’s a brushfire currently burning in your backyard. If anyone has arguments to the contrary, send them in a comment – I am interested!
  
  And as for the the MMM family – we still have a bit of leftover balance on a home equity line of credit so we’re finishing that off before resuming payments into index funds like the Vanguard S&P 500 Index fund (VFINX). Also, we don’t earn much these days so there isn’t much saving to be done – minimal part-time income and passive income from investments just pays for our low-cost but nice lifestyle.
  
  Reply
  - tony March 2, 2022, 8:15 am
    
    One risk in taking this approach is that you become dependent on the financial institution’s evaluation of your credit. For example, if your emergency happens to be a job loss and the financial institution cancels your line of credit due concerns about your inability to pay, then you no longer have access to that ‘springy debt’ you were counting on for an emergency.
    
    Reply
El Beardo Numero Uno April 25, 2011, 5:28 pm

Senor Moustache,
I am wondering, for your fellow financial pogonotrophists who do not have houses or mortgages, what financial instrument do you recommend for a springy buffer?

I currently have 6 month’s worth of little employees idling about in a savings account, and I’d really like to put them to work. I’m paying low rent, quickly paying off student loans, and saving a fair amount.

I’ve considered a High Yield Checking account, but I’m not sure I’ll be able to maintain my buffer with all of the mandatory direct deposits & debit card purchases per month.

Your Compadre,
EBNU

Reply
- MMM April 25, 2011, 5:52 pm
  
  Estimado Sr. Uno,
  
  Thanks for bringing in some new perspective – indeed many of the most promising Junior Mustaches may be renting a place at the moment and thus unable to set up a home equity line of credit. Like you, I would still feel a little inefficient by keeping 6 months of employees idle. But your strategy will vary depending on your situation:
  
  – How secure is your job and your industry in general? If things are pretty rosy, you could go for a smaller cushion and put the rest directly into the student loan to speed up the payoff even more.
  
  – Remember that a credit card is already a good safety cushion for very-short-term expenses. As long as there is no chance of not being able to pay off the balance in full at the end of the month.
  
  – And to REALLY answer your question, I think you might be interested in an “unsecured line of credit”, also called a “personal line of credit”. I just reviewed the current offerings on lendingtree.com. The interest rates are fairly sucky – ranging from 6.78% to 10%+, but remember you are very unlikely to ever use this line of credit. A local credit union might also offer good service and rates.
  
  If you can get approved, set yourself up with a personal line for about 6 months’ worth of expenses, and then blast 4 months of your current savings into your highest interest student loan. Then you’re effectively getting a return equal to your student loan interest rate. (what are the rates on those things these days, anyway?).
  
  best of luck,
  MMM
  
  Reply
  - Tim Arnold April 20, 2015, 12:35 pm
    
    Howdy —
    
    Thanks for all the thoughts MMM, have been really enjoying discovering then following the blog over the past several months.
    
    One question: since we don’t have enough home equity yet for a HELOC, I looked to lendingtree.com per your suggestion (great idea!). I haven’t yet signed up for anything, but the language that I’m seeing makes it sound like signing up for a loan requires taking that money. Since I want to use this as my springy debt safety net, I don’t actually want the money, I just want the option to have it at any point. Do you have any experience with lendingtree.com in this regard? Maybe I’m looking too much into the language they are using and actually signing up will just open the line of credit.
    
    Tim
    
    Reply
    - Mr. Money Mustache April 23, 2015, 12:35 pm
      
      Hi Tim,
      
      Yeah, you definitely want a line of credit that starts with a balance of zero and allows you to pull out money (and repay it) whenever you like. Check your local credit unions – these have been the best source for me.
      
      Reply
  - Patrick August 25, 2015, 7:00 am
    
    How is a credit card acting as a safety cushion if you have to already have enough cash to pay it off at the end of the month? What am I missing?
    
    Reply
    - Jeff September 18, 2015, 10:17 am
      
      Correction: you keep just enough cash to pay off *normal* monthly charges, but not enough for an emergency. Let’s say you put a rare and unexpected expense (large medical bill, car crash, etc.) on the card along with everything else. Since you keep it paid off under normal circumstances, no interest accrues immediately. Your statement comes due, and you still have 25-30 days to pay the charges, interest-free. Depending on where in your billing cycle the charge occurred, you’ll get an average of six weeks at 0%. During that time, you can reduce spending and new investments to pay off the bill. If that’s not enough time, you crunch numbers and make a judgment call – pay interest while continuing to pay the debt, or cash out investments and risk missing out on some gains. For larger amounts, you consider a balance transfer deal to buy 6-18 months of 0% time, probably paying 3% up front for the privilege, or get a low fixed rate by using your car or home as collateral. All are viable options depending on your situation.
      The key is that on the WHOLE, even if you have to pay some interest charges, you come out ahead because you’re using credit for short periods of time and at strategically selected low rates, while the entire amount in question stays invested 24-7-365 earning 7-12%.
      
      Reply
      - Patrick September 18, 2015, 10:35 am
        
        Ah, I get it now. Thanks!
        
        Reply
El Beardo Numero Uno April 25, 2011, 6:08 pm

Senor Moustache,
My job & industry are very secure, so I may go for a lower cushion – just enough to cover any slip-ups in cash-flow forecasting, for example.

I just realized I could put the rest of my cushion in my Vanguard account, where my long-term savings is hard at work. It takes a couple of days to get the money back out, and there are tax implications, but I could cover any short-term emergencies with credit cards.

Or, as you mentioned, I could put most of the cushion into the student loan, and just rely on my current long-term savings as a cushion.

I consolidated my student loans at an unfortunate time, and I’m paying 7% (ouch). Right now I’m distributing 75% of my “savings” into my loan, and 25% into long-term savings. I figure the 7% “return” on my loans is pretty good, and the emotional payoff of becoming debt-free is a priority for me. What are your thoughts?

Muchos gracias for your excellent blog!
-EBNU

Reply
- MMM April 25, 2011, 8:57 pm
  
  Ahh, you’re further ahead than I thought – you are already hooked up with Vanguard! I am also a long-time Vanguard index fund fan and I think it is good to put a certain percentage of your savings in there consistently. When I was younger, I used to put Everything in Vanguard and just let the mortgage do its slow auto-payment thing (figuring stock market returns should beat mortgage costs on average). But now I am more interested in the emotional peace of absolutely no debt so I’m finishing off the last bit of mortgage before resuming index funds.
  
  Also, with this being a new blog and all, I’m going for a simple message before branching off into different strategies for all different types of people.
  
  thanks again for your comments!
  MMM
  
  Reply
Chet February 6, 2012, 1:22 pm

I am 24 and trying to save as much as I can for a downpayment on a house right now. I have about $12,000 saved up towards this goal and some more money as an emergency fund but it is all currently just sitting in my bank account. I am still a year or two away from seriously considering buying, in the meantime where would you suggest keeping this money to work for me while I wait?

I have a Vanguard Roth IRA that I max out every year, is there another Vanguard service you would recommend?

Reply
- David Robarts June 24, 2015, 10:07 pm
  
  I consider my Vangaurd Roth IRA contributions as part of my emergency fund. If the account has been established for at least 5 years, contributions (but not earnings) can be withdrawn at any time with no income tax on the money (you paid the tax before you put it in). This allows me to put more money to work in the Roth IRA than I would if I needed the money and get earn a Federal Tax Credit for Saving (though I’m getting close to having too much income for that credit).
  
  Reply
Warped April 26, 2012, 4:47 pm

Chet,

Since you are planning on using the money in 1-2 years, I wouldn’t put it into stocks, or even bonds.

Some might put it in something like short term treasuries, but you risk losing some and the upside is fairly small.

Personally, I’d move it to a savings account at ING; you’ll earn maybe $100 but won’t lose any; stocks can and have gone down 50% in one year – good place for long term money, bad for 1-2 year money.

JMHO

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Timo July 19, 2012, 3:31 pm

So here’s a question for you: Springy debt sounds great, but due to the nature of the real estate market right now, I have negative equity on my condo. This means that a HELOC is out of order.

Which got me thinking: For springy debt, what’s MMM’s take on using a 401k loan? The rate is pretty low (prime +1), and with an upper cap of $50k that should be more than fine for short term emergencies.

Reply
- AB September 25, 2013, 12:30 pm
  
  I’ve been considering a similar plan and wonder what MMM’s opinion is. I currently have $14k in student loans @ 6.5%. House is underwater so HELOC is not an option. I can take a 401(k) loan at 4.25%. Lower interest, but lost earning potential as well. Verdict?
  
  Related question – I’m sitting on $5k cash in savings as an emergency fund, plus a couple thousand for monthly expenses in checking. The wife doesn’t think the savings is enough; I see it being useful for eliminating the debt quicker. Keep the peace, or do the financially efficient thing?
  
  Reply
- Joel June 20, 2014, 11:19 am
  
  I know this is going on 2 years later than your post, but a 401K loan is actually a pretty bad idea.
  
  The #1 scenario I can think of that would require tapping into an “emergency fund” (or credit fund in this case) would be losing your job, at which point the loan would become immediately due. If you don’t pay it, then it counts as an early withdrawal, then you’d have to pay income taxes PLUS 10% penalty.
  
  Reply
Double Down October 12, 2012, 3:26 pm

Thank You Mr. Money Mustache for teaching an old dog new tricks.

By following your advice from this post, I estimate you just saved/earned me $18,386 over ten years by moving money out of my lame bank account (“gotta have at least 3-6 months salary in liquidity for emergencies!”) and towards paying off debt instead, while relying on our HELOC for emergencies*. FWIW, your slightly more aggressive figure of multiplying by 177 for a ten-year return resulted in a calculated savings of $21,243. Either way, it’s close to one year’s worth of college tuition and expenses for a daughter!

*Okay, in reality I would not have been carrying this debt for anywhere near 10 years, but the point still is that I will be putting the money to work — if not paying off debt, then elsewhere — and far better than the bank rate of 0.000001% or whatever it is.

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Jason1 January 18, 2013, 11:42 am

I believe the original questioner didn’t quite understand Dave Ramsey’s plan. I have been listening to Dave for years and he doesn’t say to have 6 months expenses if you have debt. His “baby step” plan is step 1. 1,000 in the bank as a “baby” emergency fund. step 2 is pay off all debts but the house. Step 3 is 3-6 months expenses. The key with his plan is the range of cushion. Some people have more stability and may only need 3 months. Some people have a more volitile life, job, etc. and need 6 months to feel comfortable.
Love your website, great tips on frugal living but i do disagree with just a few things, mainly use of credit cards and helocs (even if you pay them off every month)

Reply
- Mr. Money Mustache January 18, 2013, 4:44 pm
  
  Thanks for the clarification, I admit to not knowing the finer points of the Dave Ramsey plan.
  
  But foregoing credit cards and low-interest financial leveraging for investments and/or emergency fund? That is crazy talk! .. I suppose if you are still in the stage where you are subject to impulse purchases, it’s a fine way to try to limit the damage you do to yourself. But at the Mustachian levels of self-awareness that we are talking about on this blog, the method of payment would have absolutely no effect on a person’s spending. A purchase should be based on your values, and your financial situation – that’s it.
  
  Thus, a credit card is just a way to get a 1-2% discount on everything you buy, with no drawbacks. Where is the problem with that?
  
  Reply
  - Todd Carnes February 5, 2014, 6:26 pm
    
    You know. I like everything I’ve been reading here EXCEPT the credit card thing. There is no way in hell I would ever have another credit card and I do not for one minute believe there is ANYTHING good to be said about buying on credit.
    
    If you want to buy something. You either save up till you can pay for it in cash or you don’t buy it.
    
    Reply
    - JT June 4, 2014, 12:10 am
      
      Todd
      
      I agree. Have just paid off and cancelled my credit card. The world seems fairly intent on paying for things via credit though, so I’ve got a debit visa card for just those times. Saving up and making sure there’s money to cover purchases and groceries and mortgage/rent is the ONLY way for this little black duck!
      
      Reply
    - Mike September 28, 2014, 11:38 am
      
      How about saving up till you can pay for it in cash, then use the credit card to get the free airline miles/etc., then paying off the entire balance? Even with an annual fee, you end up better off this way in terms of cheap vacations etc.
      
      Reply
      - Mountain Man Money Moustache March 28, 2015, 6:27 am
        
        Mike, that’s exactly right. Once you can pay off the full amount every month, then take advantage of the rewards. Beside, paying off and then cancelling ones credit card might have a negative afeect on ones credit score. At most, cut the card but keep the account open and secured…
        
        Reply
      - crunchylittlemama June 6, 2017, 10:13 pm
        
        Agreed. Your budget should be accounting for your credit card purchases as they occur. The problematic thinking that many fall for is that if you pay off your credit card each month you are living within your means. If you have that money in the checking account just in time to pay the bill, but not when the purchase was made, then, technically, you did not have the money to pay for those purchases when they were made.
        Ideally, the money for those purchases should be in your checking account on the day those purchases are made because, ideally, you budgeted for them ahead of time. When a credit card is used this way, a financial hiccup during the month is less likely to leave you unable to pay off that credit card bill.
        Personally, I never realized that distinction until I had been using YNAB budgeting software for over a year. As I got a better hold on my budget, I could clearly see that although I might have $1600 dollars available in my checking account, I had zero dollars available to budget for the month. Low and behold, the charges on my credit card were $1600.
        When using a credit card in this way, you have a built in cushion of sorts, wiggle room equal to your grace period…just in case.
        
        Reply
    - Jonathan May 31, 2017, 8:12 am
      
      There are two types of people in this world.
      
      1) Those who can never have a credit card because they impulse buy without the ability to pay on time when the debt is due. The 1% or 2% credit card usage savings, will never work in this person’s favor because the late payments will overcome any savings.
      
      2) Those who only use credit cards for things that they can afford, and have the money to pay off BEFORE incurring late payments (i.e. on time). They can best take advantage of credit card savings or cash back programs.
      
      There is nothing wrong with being a type one person or a type two person. The trick is identifying which person you are, so you can best meet your financial nirvana.
      
      Reply
      - Nice joy August 26, 2017, 7:55 pm
        
        Well said. Made around 1600 this year using credit cards. Credit cards are like a gun, it all depends on how you use it.
        
        Reply
Calvin February 1, 2013, 2:19 pm

Alright– I respectfully request clarification on the strategy of leveraging cash on hand via line of credit to pay down student debt as mentioned above. My current understanding and situation are as follows:

I have a $25k emergency fund in my checking and $79k in student loans (putting extra $800 towards principal monthly). Are you suggesting I take out a line of credit to replace my cushion and apply the cash towards debt?

So, If I lost my job for 2 months, for example, I would then rely on the line of credit to cover expenses until I get another job and am able to cover expenses again? Then, I would have 2 month’s worth of expenses as debt that is accruing interest and becomes the primary focus of all extra money until eliminated?

This strategy would drastically reduce my debt principal, increase amount of payment that goes to principal rather than interest, and shorten time until loan is eliminated and total amount of interest paid, correct?

And the risk of employing this strategy is the potential of having to pay interest on two months worth of expenses? So, the less the chance of me needing the line of credit the safer it is to use?

Also, lines of credit do not have the grace period that credit cards do, correct? So, if I draw $1000 and repay it before the next “billing cycle” ends I would still pay interest on it, correct?

Thanks for your time and the blog! I think I am beginning to see some peach fuzz developing on my upper lip as I continue digesting your wise ways. Much appreciated.

Reply
- Mr. Money Mustache February 1, 2013, 3:54 pm
  
  Hi Calvin – YES on all counts – I’d definitely dump that HUGE emergency fund into the student loans, as long as you have a nice open line of credit with the checkbook and debit card in hand and ready to use.
  
  I’ve never had anywhere close to $25k in cash in my life, except just before buying houses when it was needed for the downpayment.. and still don’t keep that much even today!
  
  Reply
  - Calvin February 4, 2013, 8:33 am
    
    Thanks MMM! Looking forward to tackling the debt head on!
    
    Reply
Mark April 5, 2013, 7:41 am

Thanks for all the hard work on this blog. I just discovered it and like what you have to say. A question: where do you save the money for a new to me car? I just changed jobs, but think I will be able to save 200 per month, but that means I have the cash for 4-5years before I need it (unless a transmission goes out, as just happened, but another story). Where should the pool of up to 10k go? CDs? Money market? Thanks.

Reply
- StraightStache April 11, 2013, 12:12 pm
  
  Mark,
  Bonds produce decent returns in 4-5 years. In your case I would split the savings between a high interest savings account and bonds. It’s always good to diversify. Be careful of fees when you’re getting bonds though. It would eat into your return quickly if you are having to pay fees often. Some places will waive fees if you have an automatic investment. I would start moving the money out of bonds as the time to buy the car approaches.
  
  Reply
Nath June 17, 2013, 7:16 am

Here’s an interesting way to make a cash cushion work for you: In Australia we have something called an offset account. It is basically a bank account linked to your mortgage. instead of “earning” you interest, the amount in the account offsets interest you are currently paying on the mortgage. Which is effectively a guaranteed 5.3% , and it is tax free as it is interest “saved” not earned.

So my wife and I keep $100k in this account for emergencies or savings etc. similar results could be achieved by paying extra into your mortgage and then “redrawing” it later. If they allow this sort of thing in the states.

The icing on the cake is this account we are using is on an investment property which has tax deductible interest also. The home we live in is owned outright…

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Logan September 16, 2013, 3:24 pm

I have a bunch of debt that is inhibiting my ability to save and get ahead. I have a cash windfall coming up that I already plan to put towards eliminating debt. That said, I’ll still have some debt left over. I also have ~$5K in a retirement account. Not sure if you’ve covered this before, but would you recommend cashing out that retirement savings to help pay down debt? Thx in advance.

Reply
- DividendMan October 24, 2013, 9:38 pm
  
  Logan, that depends on the type of retirement account. Check what the penalties are for withdrawing money from your retirement account vs the interest on your debt and do the straight up calculation to make a decision.
  
  It’s very hard for me to find the logic in putting money into a 401k unless you are: 1) getting an employer match aka “free money”, 2) you are in a high marginal tax rate (in which case 5k shouldn’t be something to sweat over anyway).
  
  So, what this means is that you shouldn’t put money into a 401k unless 1) applies.
  
  Reply
Jill November 4, 2013, 2:19 pm

Hi MMM! I’m an avid follower if YNAB and was introduced to your website via Jesse. This is article is totally eye opening to me. It’s very hard for me to imagine taking your advice, though. My situation is almost 28k in savings and one loan, a 48k mortgage at (ahem) 2.7%! I am currently not making extra payments because we are focusing on two things: saving for a down payment on a second home and applying for a home equity line of credit to purchase a rental property. Any thoughts on if we’re doing the best thing or should I actually consider paying off a large amount of our loan?

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Kristi G January 21, 2014, 12:48 pm

Hi MMM! I am a new reader. I found you about a week ago and am working through your blog from the beginning. I hope you still read comments this far back!

My husband and I are recently debt free after following Dave Ramsey’s program. The next step, per Dave, is to save up 3-6 months expenses and that is what we planned to do. First, we want to save up 5k to cover our new much higher insurance deductible. I gather from the comments that you would not recommend we do this, but I am wondering what your suggestion would be.

For a little more detail: We own our home. We pay a mortgage on it but were able to build in a large amount of equity. We already live quite frugally (more so than you on some things) and our largest expense is gas. My husband currently has a 60+ mile commute one way 5 days a week. We are working on getting him closer to home which will free up a substantial amount of cash each month.

The plan was for this cash to go into our savings for the next few years until we have our cushion, THEN we would begin to invest. What would you suggest?

Thank you so much!
Kristi G

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John B March 12, 2014, 5:08 pm

Your springy debt concept is great for those who have the discipline. The problem is that the presence of and reliance on any credit card is a constant temptation to get in debt. I don’t think any one should even try the idea until they have all their basic savings in place at a minimum (no debts other than the mortgage, six months living expenses saved and accessible in case of emergency, and an ongoing habit of saving and investing.

Love your blog BTW.

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John G October 21, 2014, 11:41 am

This post was fantastic, and got me strongly on the path to Mustachianism! I just closed on the home equity line of credit last week, and embraced the prospect of dumping the way too much cash I had saved up into the mortgage. Doing so gave me a goal of finally paying off the mortgage completely, which I’m now on target to do by April 2015 (or earlier!) after quite a few money moves in the last 6 weeks. I’ve always thought of myself as fairly frugal, but it wasn’t until reading this blog that I realized that celebrating my net-postive budget of $798 on a $205,000 family income was absurd. Now I’m cutting all over the place, got the HELOC and mortgage lined up, and have set a retirement date of just over 7 years from now, 12/31/21. Great blog, and great education for so many people, including me. And so you can feel even better, I’m a Harvard Law School graduate, and this blog has easily become one of the most influential things I’ve read. Good stuff, Mr. Mustache! Good stuff.

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Marsh November 12, 2014, 9:04 pm

Hello Mr. Stache. I currently have approx. 12k in my checking (i know, waste of money) and approx. 20k in my savings (earning a pathetic $0.17 per month). – I do though, put 8% of my income into a 401K and my employer matches up to 5%. I have been putting money into my savings for a downpayment on a future house (I live in NY so I needed more than usual), but I think I am ready to purchase something (maybe around the 150K range). Anyway after reading an earlier post I decided to dust off the cobwebs on my Trade King Acct (discount broker) and put about $1,025 in and purchase some SPY shares. Is this a good idea? should i put more, or wait till I buy a condo? I also considered VONE, THRK, or IVV, or do you recommend the Vanguard route? Thinning short term, each trade (in Trade King) costs $4.95, won’t this outweigh the interest? Anyway, any help/advise is greatly appreciated. I also don’t have any debt, so I want to do something smart with my money..

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Ryan April 22, 2015, 3:00 pm

MMM,

I’m 21 with 1000 dollars worth of Debt and zero net worth. I just got a job thats paying 50,000 a year though and i have no car, no home (live with grandparents).

I’m confused on where to start.

I need to figure out how to save up for my own place, plus a cheap car, plus still save enough.

Current expenses are only food and i spend 400 a month on that and about 250 a month on fun stuff which i can cut down

I invest 15% of pay into 401k and an additional 660 into roth and traditional ira accounts.

I want the 6 months savings to be very liquid so i was going to put 25k into a capital one 360 account earning .75% interest and then just throw everything else into 401k/ira accounts after i hit that.

But im confused how to save so much but also get enough saved to outright buy a car and then rent my own place as i have exactly 12 months before i have to move out.

PLEASE HELP :(

Reply
- James April 29, 2015, 3:38 pm
  
  Hey Ryan,
  
  So I am sure you would much rather have MMM’s advice than mine (that is of course why we are all reading and commenting on his blog)… but I thought I would share my thoughts as I was in a very similar position to you 5 years ago. Granted my debt position was slightly higher than yours and I did not have family to live with in the city where I got my first job out of college…
  
  1) You are in a better debt situation than almost every single one of your peers… that being said, knock out that 1k in debt in with your first couple paychecks.. Unless you locked in a magical, interest free loan of some sort, then you cant really go wrong getting rid of it… dont pay interest for something that you dont absolutely have to.
  
  2) If you are saving for place that you are going to rent – When you do go to find a place, avoid the traps that so many of my peers fell into… they all thought it was imperative to live right downtown… so they promptly forked over $month to live in a 1br apartment… that is a ridiculous waste of money. I chose to live about 1.5 miles south of downtown and could easily walk it in 30 mins (or bike in ~5). I payed $600 a month for a larger apartment. I could have done even better by getting a roommate and splitting a 2BR in the same building for $400 a piece… I would recommend something similar… dont fall victim to money drain that is living in the most popular place.
  
  3) If you are saving for a place to buy – only buy if you are going to hold the property for a long time. Housing is basically back at the 2006/2007 peak so it isnt exactly cheap anymore. Look for a place that you could rent out a room or two to friends so that they can pay your mortgage with their rent. Also, I would strongly recommend not buying unless you can put AT LEAST 20% down (plus closing costs) so that you can avoid paying private mortgage insurance (PMI). I was stupid and did not do that… so while my overall mortgage payment was relatively low… the PMI added a ridiculous percentage to the bill… money that I was just throwing down the drain.
  
  4) Go for as long as you can without a car. I lived primarily without a car for the first couple years and it saves a ton of money (I’m sure you’ll have noticed MMM’s notes about his thoughts on car ownership).
  
  You are in a great position and you can easily put yourself on the path to early retirement (real early retirement… not the BS that Money and other mainstream financial media talks about). Crank up your savings rate with every raise and make sure that you aren’t throwing away money on high fee funds or advisors.
  
  Good luck and good saving!
  
  Reply
Mr Military Mustache August 18, 2015, 6:44 am

I would recommend a small cash equivalent cushion to cover minimum expenses in case of unemployment. Here’s why – I had a nice LOC with Key Bank, and when I deployed, my paycheck a stopped auto-depositing in my Key account (my Army checks went to another account). Simulated enemployment. Within one month, Key Bank shut down my LOC, which had never seen a late payment! Love MMM, but I’m with Dave Ramsey on this one. Luckily, you don’t need cash under the mattress. Just start yourself a stash in a Vanguard index fund account that allows withdrawal without penalty at any time.

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Glen April 22, 2016, 6:31 pm

Newish reader here, going back through all the posts since the beginning of time for a second time, this time reading the comments as well. This is the post where I realized that MMM is smarter than any other financial advice guru, since he is the only one I have seen advocating for credit as an emergency fund. So obvious once you think of it. (I would feel a lot safer using credit cards than a HELOC, though, in case the shit really hits the fan you can BK out without losing your house.)
Here’s the worst case scenario for me: I get fired from my cushy job and it takes me a long time to find a new one. With the limits on the credit cards I have, I could live 3 or 4 years at MMM’s level of spending. At the end of that time, if I still couldn’t find a job, I could declare bankruptcy be out of pocket approximately $0.
What other kind of “emergencies” are there for someone who is saving a substantial amount of money each month? OMG, it’s an emergency, I have to buy a Mercedes? Ransom payments? Any other unforeseen money event could be put on a credit card and paid off over the next month or three instead of putting that money towards saving.

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- Jonathan May 31, 2017, 10:00 am
  
  It’s sad how flippant people are about bankruptcy these days. Especially since companies just pass on the losses to those who actually pay on time, through higher fees and less benefits. Bankruptcy used to be a shameful event, now it’s something that people willingly accept as normal.
  
  Reply
Greg August 20, 2016, 5:19 pm

“A mortgage, on the other hand, is one-way debt, since you can pay extra on the principal, but never suck money back out when needed”

Why don’t you have a mortgage with a redraw facility ? Love reading your blog.

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Ashley August 29, 2016, 2:41 pm

I’d like to move out of my overpriced apartment in LA (closest I can find to work within my price range and still $1750/month) and buy a house elsewhere. I need to save a downpayment between 20k-40k for the markets I’m looking in. I currently have 11k in student loans and 14k left to pay off on my car.

Would you recommend paying off the car payment and student loans before saving for a home down payment and moving? I’d like to start building equity in a forever home instead of paying 21k in rent per year but I’m not sure if I should because of my current loans. The interest rate on the car loan is 3% and the student loans are 4% to 6.8%. By owning a home, I would have the home equity credit line for emergencies and would save a ton on my biggest expense -rent. I estimate it will take me 1-2 years to pay off the loans and closer to two years to save the home down payment.

Any suggestions?

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- adam August 29, 2016, 8:09 pm
  
  I would not think about buying a home now. Focus on first eliminating the student loan debt and car loan. If you want to advance yourself forward, please sell the car and buy another car for $1,500. You can always find roommate situations which are more feasible. If you prefer being private, continue searching Craigslists ads for less expensive apartments and don’t be afraid to negotiate with the land lord. As MMM has stated, usually in the expensive neighborhoods it is better to rent over own. Once you move to the ghetto and houses are under $13ok then you can consider owning. If you want another perspective check out this awesome youtube video https://www.youtube.com/watch?v=IomfI_iF4EM
  
  Reply
- CelticBear August 30, 2016, 1:53 am
  
  Hi Ashley, here’s a few ideas/suggestions that you’ll pick up from other gems around this blog.
  Why not sell your car, buy one of the many great very affordable second hand automobiles out there and use the remaining cash to pay down that 6.8% loan? Would that take your timeline for paying off the loans closer to the 1 year mark? If your new to the mustachian way of thinking you’ll probably find other excellent tips on the blog that will help you shrink you loans even faster by cutting expenditure further. Then you 1-2 years might be down to 6-12 months. Your dream home just got a lot closer.
  
  Then it’s time to bust out a spreadsheet and carry out a few quick calculations. You might be able to pin down your loan free date exactly (at this stage you’ll realise you’ve gone full blown mustachian. Don’t panic. Just enjoy the ride). That loan free date is the exact moment you begin saving for your forever house. It could be just 8 months away. That’s April next year.
  
  Now maybe you’ve already embraced frugal living and these timelines are me being too enthusiastic but if not then you’ll also be able to cut the time down on how long it take to get your deposit with the new frugal lifestyle.
  
  Reply
- Jay Holden August 30, 2016, 6:59 am
  
  Including property taxes, P&I, PMI, and insurance – how much house will $1,750/mo get you assuming a 15-year loan?
  
  Where I live that’ll buy a fancy 4-bedroom 1.5-bathroom in a safe neighborhood, but I don’t live in the insane asylum market known as LA.
  
  Also, what APR do you expect on this loan?
  
  Personally I’d pay off any 6.8% debt(s) before anything else.
  
  Also your car’s too expensive, hope the insurance is low and the mpg are high.
  
  Reply
Brian September 9, 2016, 8:28 am

I know that this is an old thread, but I just read it today. Aren’t you increasing your risk by moving debt from an unsecured credit card to a secured HELOC? I understand the difference in interest rate, but let’s say one is living from paycheck to paycheck(not me fortunately) and they lose their job. In the case of the credit card debt, they will bug the shit out of you to pay, but at the end of the day, they are fucked. But that person had moved their debt to be secured by their house, at some point, the house can be taken(foreclosed). This is an increased risk that someone who is paycheck to paycheck is probably less able to handle than those of us who are saving 50% of their income. We can afford to float it because our expenses are in check.

Comments?

Thanks,

Brian

Reply
- Vik September 27, 2016, 2:21 pm
  
  This article is not aimed at optimising debt collection risk in the case of a default. As you note it’s an unlikely situation to be in for a mustachian who will very quickly have years’ worth of living expenses accumulating in their investments and who is not living pay cheque
  
  Reply
Vik September 27, 2016, 2:26 pm

I’ve got a $30K LOC [not tied to home equity] that I keep empty and use as my emergency fund. At one point last year I was feeling unsure about my contract situation so instead of investing my savings each month I held them as cash for 2-3 months. I resolved the issue causing me concern and got the funds invested and working for me.

Having a LOC is great. It gives me lots of flexibility if I need to pay for something that doesn’t line up with my invoicing cycle [I’m self-employed] and if I needed to I could live off the LOC for 18 months while earning no income and not touching my investments.

That’s a great sense of security for a tool that costs me nothing when I don’t use it and doesn’t require the portfolio sapping drain that sitting on a large ‘stash of cash does.

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Belle February 5, 2017, 8:28 pm

I’m in Australia and I do have a home loan that I can withdraw from.. I can’t remember what type of loan it’s called – possibly an “offset account” – So basically instead of saving money in a bank account, earning basically nothing, I put what I can into my home loan account, which reduces the interest each month, but I can withdraw money if need be.
Just thought this might interest some people.

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Trevor M April 6, 2017, 8:23 am

Hey MMM,

How much cash do you suggest a family of two have on hand at any given time?

Wife and I have have close to 8k in credit available to us and near the same amount in cash.

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Tasch July 31, 2017, 6:11 am

I am in an odd situation. I am quite well off but the banks/companies won’t give me credit for even $1000 worth of credit cards. We (my hubs and I) have no debt, $5000 sitting in a credit card (in my other halfs name as my credit with institutions is non-existent), $16,000 in a bank account and they won’t loan me a dime. Depressing. I know this is an old thread, but what should an old fashioned cash-for-everything girl like me do?

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Vel February 22, 2018, 9:57 pm

Credit cards, used to be my favorite gaming thing back in my country (9 cards, revolving balance transfers with reinvestment if that money in high yielding investments). It’s been 12 years since I stopped that game, after I started earning more to support my self.

Local credit union gives free balance transfer with no fee sometimes and some credit cards offer no Apr for some time. So, it’s free money. I make use of it.

I see a dollar as 1.5 dollar (which has my unearned ones), so each purchase is calculated, valued and spent. After reading the post comments, I can see how the plastic get into heads of people.

I just didnt see this covered, but it need high discipline to stack the extra cash. The cc game isn’t for everyone though.

Reply

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