My Best Buy of the Week this week is rather unusual, because it's not actually a purchase that I made. Let me explain.
My father-in-law plans to retire in Oklahoma. He and his wife came for a visit this past week specifically to shop for their retirement home. They found one...a nice 3 bedroom, 2 bathroom house just a few blocks from where I work. The only thing is they are not yet ready to retire, and they are both still working in New York. They will probably retire in 2 to 4 years.
In the meantime, they are going to allow me, my wife and our two kids to live in the home for the next few years...rent free! You know my motto: if it's for free, it's for me! It really is a very generous gesture on their part. They get long-term house sitters, and we get rent-free housing for the next few years.
This means that my family will immediately save $750 a month...what we are currently paying for rent. But, we aren't going to consider this "mad money". On the contrary, we have big plans for this suddenly-available cash.
First, we are going to take about $250 per month and use it to eliminate our debts. The other $500 per month will be parked in a high-yield Internet bank savings account, earning 4-5 percent per year. I would put it into something like mutual funds, but I want to keep the cash liquid, in case we need it for emergencies.
At the end of 2 years, we should have more than $12,000 stashed away, and if they decide not to retire for 4 more years, nearly $50,000. This will go a LONG way toward helping us purchase our own home when the time comes. If you have other ideas for saving this money while making it for us over the short term, leave a comment to this blog. I'd love to hear your ideas!
It will be awfully hard to beat this Best Buy of the Week, but by saving and continuing to live frugally, it will be one which will benefit my family for years to come!
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If your debts cost more than 4 or 5% in interest, wouldn't you be better off paying them off with the whole $750 first, THEN starting the savings account?
Maybe like this: save $1000 for an emergency account (if you don't already have it) as you propose. Once you have the $1000, you can put all $750 into paying off the debts. Shouldn't take too long at that rate! And won't you feel great when they're gone! In the meantime, the $1000 covers the everyday emergency like car repairs, etc. Then, when you're debt-free, you can save all $750. And you'll have spent less on interest.
I have a few debts which would qualify under this plan: my car payment, one credit card and two tax bills. The total amount of those debts is about $22,500. Since I may only have two years to save the money I need for a down payment on my own home, I would probably modify the savings/debt repayment plan. I will actually have about $1,000 a month to play with, so I'll use half to pay debt, and save the other half. At the end of the two years, I would still be making car payments, but I would have significantly shortened the amount of payments I have left. I do also have medical bills I need to repay, but I'm probably going to try and negotiate lower payments for those. End result: $12,000 in debt paid off, and $12,000 in savings. Owning my own home will pay off in the long run. It's an investment, and I won't be throwing my money away in rent.
I'm the same poster as above.... I still think you'd be better off getting RID of the debt first! If you make a really aggressive effort, you could pay it ALL off. Sure, you would only have your $1,000 emergency fund saved, but you could start saving every penny for that down payment. And you'd spend the least in interest.
If you have a high debt load when you buy the house, you may have a hard time getting the best interest rate. Once you buy a house, you are going to want to spend on house stuff - gardening, painting, floors, etc. etc. It will be REALLY hard to continue debt repayment, and that $10K debt could stretch for many years, with another $10K in interest!
How do I know this? I've lived it! Being debt-free would be the very best use of that money -- make the comparison and see! Maybe make a chart showing how much you'd end up spending for interest over two years, then four years -- and compare what your bottom-line numbers are for how much you pay and how much you save in both plans.
Anyway -- you're the one who is going to live YOUR life, don't replay mine! I'm STILL paying off those debts, and it's 22 years since we bought that house. Divorce, special-needs kid, unable to earn as much because of said kid.... lots of stuff comes up. Get rid of the debt!!!