Our debt is all at low interest rates. Our highest debt is carried at 4.9%. We have had to take a serious look at whether the emergency fund in the bank is worth the interest on the debt.
Our savings earn between 4.5 and 4.8 percent, depending on where it is parked. Our weighted-average interest rate is about 4.4%. After taxes, our earnings on savings runs about 3.75% or so.
In other words, to keep $10,000 in the bank and not pay debt off, it costs us about $65 per year in interest.
We have decided to pay our loans back slower than we had originally imagined because I’m thinking of making a move and starting my own company. As such, the money in the bank will be an additional cushion that costs us about 0.65% per year.
UPDATE IN 2009
Wow, things have changed. First, our debt has gone down significantly since writing this. Second, we don’t earn nearly as much on our savings as we did back in the middle of 2007 when this was written.
What hasn’t changed is our cost of the debt. Our (weighted) average of our debt is about 3.5% and we earn about 1.8% on our savings after taxes are taken into account.
What’s this mean? Our cost to carry the same $10,000 in debt we talked about in 2007 would be $170 per year, an increase of 2.6 times! Ouch.
This highlights how the change in interest rates can have an effect on your net income for the year.