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Ask Dave

Depleting the Savings

Chris and his wife have enough in savings to pay off all their debts except their house. He's nervous about paying it off since that will take them down to about $1,000. Should they deplete their savings?

QUESTION: Chris in Sioux City and his wife have enough in savings to pay off all their debts except their house. He’s nervous about paying it off, though, since that will take them down to about $1,000 in savings. Should they deplete their savings?

ANSWER: It’s good that it makes you nervous, because that will motivate you to put it back. If you have $23,000 and use all but $1,000 of it, you can put $22,000 back into savings in nine months. Here’s the missing element: The gasoline on the fire that causes it to become a bonfire in this situation is your level of passion to get your act together financially, which causes you to sacrifice your lifestyle so deeply.

When you are working your debt snowball, all money goes at the debt except the house. The number-one thing here is incredible passion of you being sick and tired of being sick and tired. The deeper your passion, the deeper the cut in lifestyle, which accelerates the mathematics. We want to get out of this debt fast.

I want to increase the depth of the pain so I decrease the length of the pain. You have to stir that up inside of you. That’s something you and your spouse have to be in agreement on, but that’s element number one.

Number two is complete focus on the debt, so we stop all saving and all lifestyle except the bare necessities and do a scorched-earth, beans-and-rice thing, and we attack the debt.

Stop your 401(k) contributions temporarily. When we start talking about how $22,000 is gone and you have no debt, and you can put that back in nine months, that means in four months you’ll have $12,000 or $13,000 laying there. The amount of time that you’re living without a cushion is a fairly small amount of time. That’s what I come to in my equation just looking at the big numbers.

I would agree with you that, if you take two or three years to clean this up making $85,000 with only $1,000 in the bank, that would get pretty scary for me. My premise is that we’re going to shorten the time by increasing the focus, increasing the passion, and increasing the depth of sacrifice. With all that, I decrease the amount of time it takes, as well as decreasing the risk associated with having almost no savings because you won’t have almost no savings for very long. Every month, there’s going to be $2,000 or $3,000 popping into your savings.