This was my dilemma a few months ago. I had a loan (well actually a few) and a tiny little emergency fund called my Never Go Back to Fresno fund. I was slowly adding to my little savings account because I kept reading everywhere that you needed to have an emergency fund and have some kind of savings. Since I am a dirt poor student, working for minimum wage right now I was only able to put in about $2-$5 a month into my savings but I was really proud of doing so after paying all of the monthly bills.
Then I sat and thought about one of the bills that I was paying. The interest rate on the loan was over 10% while my savings account was earning 4.5%. The amount of money that I had in the savings account was less than half of the balance on the loan so what was I really doing? I decided to raid the savings account and use all that money to kill off the loan.
This strategy was part of my debt snowball to reduce all the debt that I have. Now I have no savings account….but I also have one less loan. I think that some people thought I was crazy to raid the savings account to pay off the loan ahead of schedule but in the end I think it makes more sense. The amount of money that I would have been getting in interest on the savings account would be a lot less than the amount I would be paying in interest if I had continued to pay the loan according to the schedule set out by the bank.
What do you think of my strategy and what would you have done if you were in this position? Comments are open and I welcome your input.