Color of Money: Don't keep debt around like it's a Pet Rock
WASHINGTON -- For those too young to remember, there was once an entrepreneur who actually got more than a million consumers to pay $3.95 for a "pedigreed" Pet Rock.
Gary Ross Dahl, who created the Pet Rock in 1975, even had an instruction pamphlet for the care and training of the stone, which came in a cardboard box with air holes.
"Your PET ROCK will be a devoted friend and companion for many years to come," the instructions said. "Rocks enjoy a rather long life span, so the two of you will never have to part … Once you have transcended the awkward training stage, your rock will mature into a faithful, obedient, loving pet with but one purpose in life -- to be at your side when you want it to, and to go lie down when you don't."
For many people, their debt has become like a Pet Rock. It has matured into a faithful companion that has been hanging around for years. And this can be the case even when they have the money to pay down the debt.
The Pet Rock phenomenon came to mind recently when I received a question during my weekly online discussion.
Q: We have about $70,000 left on a student loan, with no other debt. We have the cash on hand to pay it off in full, but it would mean clearing out a few index funds and dipping into our cash savings. We have $100,000 in retirement funds, and maybe $20,000 in cash. No children yet, and we are in our early 30s. We are typically savers, and my spouse's job is secure and stable, bringing in around $100,000 a year. Is it a wise idea to completely raid our savings to pay this off, or should we hack away at the debt over time?
It's important while you are paying off debt to keep some savings. If you don't have any money set aside, and a financial emergency happens, what would you do?
The choice is often to use credit -- debt -- or borrow the money from a friend or family member. In fact, the Federal Reserve says 40% of Americans can't cover a $400 emergency expense without borrowing or selling something.
But how much should you keep in savings versus paying down your debt?
Here are some things to consider before raiding your emergency fund and/or investments to get rid of debt.