Is it Really That Simple?

by bigcajunman on September 19, 2012

One of my first posts I wrote here was It’s Simple Isn’t It (I invite you to go over and have a look, it’s still pertinent (IMHO)).

The simple idea was the following equation:

Incoming cash - Outgoing cash = SAVINGS (or Losses if negative)

Given we have now defined debt-free do we need to change this equation? I don’t think so.

Outgoing cash is all your payments, and if you are paying down debt that is part of your outgoing cash, hence why if the difference is negative you have losses.

I have seen this equation obfuscated where folks who have debt, claim they are saving as well, which seems a little bit contradictory. If your debts - savings is a positive number you are most definitely still in debt, so you aren’t “saving” you are simply putting money aside (that might do better paying down your debt).

Many argue you need:

Emergency Funds
Rainy Day Savings
etc., etc., etc.,

But depending on how much you are paying on your debt, wouldn’t you be “saving” more by paying down your debt ?

So I leave you with the question: Is it really that simple?

{ 8 comments }

{ 8 comments… add one }

My Own Advisor September 20, 2012 at 11:10 am edit
For me, it makes sense to have a few $K in an emergency fund while having a fat mortgage (like we do) that is being paid down over time. I believe emergency funds are essential. How much you need depends on the emergencies you want to survive.

Even though, incoming cash – outgoing cash = SAVINGS, which is happening in our case, you can remain in debt. Just over time, the debt should be less.

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Denis September 20, 2012 at 10:02 am edit
Everyone need smoney put aside as an emergency fund. Most people have an emergencysuch as the car breaks down, you then have a finacial emergency as you don’t have the money to pay to fix it so you use the debt carrier of a credit card. Enough of those and you have a maxed out credit card.

Save some money, and when that emergency comes along, pay cash! Replenish the emegency fund and carry on till the next one comes along. What sucks is when you have 3or 4 emergencies all in a row before you can replenish… been thru that and I am here on the other side of it all , with no emergency fund, but working on replenishing it.

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- bigcajunman September 20, 2012 at 10:25 am edit
  I agree, but I always wonder about people who have large “rainy day” funds and also carry large Debts at the same time. Emergency funds are important (no argument) but is a paid off line of credit an emergency fund? Some might say yes, others would vehemently disagree, it’s an interesting debate.
  
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Rob Bennett September 19, 2012 at 10:52 am edit
My view is that it is not that simple.

Some forms of spending have future savings built into them because they represent an investment as well as consumption. Spending to build a business will increase your income and thereby ultimately increase your savings while spending at an expensive restaurant is all consumption.

That’s just my quick reaction to the question.

Rob

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William @ Drop Dead Money September 19, 2012 at 6:32 am edit
Yes.

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- bigcajunman September 19, 2012 at 12:05 pm edit
  You sure ?
  
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Forest September 19, 2012 at 5:45 am edit
I think the simpler you can make it the easier it will be to keep life in order in general. Saying that an emergency fund can be handy even if you do have debt so you don’t have to dig into more if any emergency does happen. I know theoretically it may save more to pay all your spare cash to debt in the long run but it’s about being comfortable with upsets too!

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- bigcajunman September 19, 2012 at 12:06 pm edit
  Agreed, it is what you are comfortable with in terms of living. If you can’t sleep without an emergency fund, then by all means have one, however, leaving money to do nothing, while you carry debt is always an interesting quandary too.
  
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