Thinking about raiding E-fund to knock out loans

[Loud Noises]

DW and I have decided to get rid of our student loan debt on an accelerated timeline.  We owe roughly $11k total at interest rates between 2.32-3.5%.  I used to be okay with riding minimum payments at such a low rate, but we've decided that we want to be able to close that chapter of life asap, for both monthly liquidity and emotional reasons.  (We technically have plenty of space in our monthly budgets, but would like to get rid of the payment and just be done with this stuff.)

Here's the thing.  We plan to pay off everything in the next 4 months, but I'm very tempted to take our roughly $11k cash emergency fund (earning 1%, online savings account) to knock it out now and then just replenish that over the next 4 months.  I know it is risky to be low on cash for a couple months. But we are DINK, with only mortgage debt after the loans, and could easily pause retirement contributions if a true emergency came up this summer. 

Am I being a bit too daring and impatient?  Or should I go for it now and know that the loans are done?

[dividendman]

Mathematically it makes sense, obviously, to pay off the loans that have a higher interest rate than your bank account.

However, if you raid your emergency fund and pay off the loans, and then disaster strikes, are you going to be ok or not? If the answer is no, keep the emergency fund. If the answer is yes, then pay off the loans.

Note that if the answer is yes, you probably don't need an emergency fund at all.

[CNM]

Can't you take a split approach?  Decide an amount of money you'd like to keep in an e-fund (I'd suggest 1 month of expenses) and the rest pay off the loan.  While it might not knock the loan out all at once, it will be a whole lot faster (and less accrued interest).

[big_owl]

No no no no nooooo

Save the emergency fund.  They're low interest rate and it's only a few months.  Just wait it out.  It's called an *emergency* fund because it's for *emergencies*...which usually happen at the most inconvenient times. 

Suck it up and just stick with what you're doing.  Throw all your free cash flow at it, but keep the emergency fund. 

[AlwaysLearningToSave]

Its all a matter of how much risk you are comfortable assuming.  We recently chose to use our emergency fund to kill the last of our high-interest student loans.  Like you, we were in a position to pay them off in a few months with income or use the e-fund to kill them now.  It was a little scary to think about it but the longer we considered it the more we just wanted to pull the trigger and be done with them.  We are now on the other side with no loans (woohoo!) and a somewhat uncomfortably small cash cushion (yikes!). 

For us, we figured there was low risk of loss of income and, if a truly dire emergency occurred, we could rely on family (though this would be a truly desperate last resort).  Our spending is low enough that the efund will likely be back to where it was in a couple months and we will build it larger than it was before shifting to retirement savings. 

Only you can assess what level of risk you are comfortable with. 

[zinethstache]

I LOVE to mark things off the list as DONE... and very often at the tail end of a project I will push hard to get done early. You do mention other emergency options if it really came to that so I like the split the difference approach.

If you had a history of financial weakness perhaps or other debt lurking around other than your mortgage, or kids perhaps I would say ride it out.

If it were me, I would go all out and void the emergency fund to see all debt abolished 4 months sooner. But I know I am financially responsible and have other options open to me (also have no dependents).

I am very excited for you, getting out of debt is a very big deal and gives financial and emotional freedom!

Next you can work on the mortgage...

[AZDude]

As long as you both feel like you have decent to good job security, then it shouldn't be a problem. Chances of both of you losing your jobs is slim, so you should be OK.

[BigHaus89]

I would personally knock out the loans with the E-fund and rebuild it over the next few months. It depends on what you are comfortable with, how secure your jobs are and how flexible your financial position is in case of an emergency.

[2buttons]

I would personally knock out the loans with the E-fund and rebuild it over the next few months. It depends on what you are comfortable with, how secure your jobs are and how flexible your financial position is in case of an emergency.

+1

Your debt is an emergency.

[big_owl]

I would personally knock out the loans with the E-fund and rebuild it over the next few months. It depends on what you are comfortable with, how secure your jobs are and how flexible your financial position is in case of an emergency.

+1

Your debt is an emergency.

I don't have any vested interest in this so really don't care what path they choose, but how is $11k in loans that will be paid off in 4mo (with "plenty of spare in our budget") at 2-3% an emergency?  It's not even close to an emergency.

An emergency is getting t-boned while bicycling to work tomorrow morning, dissolving both of your legs so you can't walk or work for several months and get stuck on disability.  Or getting into a bad car accident with same results, or having sudden cardiac arrest or a stroke or maybe your spouse makes a stupid decision and drives drunk and runs a kid over and loses her license, job, goes to jail and you're facing lawsuits.  Or maybe one of your parents ends up really sick and needs someone to take care of them.  Or a tornado wipes out your entire house and you're literally on the street tomorrow morning.

[2buttons]

I would personally knock out the loans with the E-fund and rebuild it over the next few months. It depends on what you are comfortable with, how secure your jobs are and how flexible your financial position is in case of an emergency.

+1

Your debt is an emergency.

I don't have any vested interest in this so really don't care what path they choose, but how is $11k in loans that will be paid off in 4mo (with "plenty of spare in our budget") at 2-3% an emergency?  It's not even close to an emergency.

An emergency is getting t-boned while bicycling to work tomorrow morning, dissolving both of your legs so you can't walk or work for several months and get stuck on disability.  Or getting into a bad car accident with same results, or having sudden cardiac arrest or a stroke or maybe your spouse makes a stupid decision and drives drunk and runs a kid over and loses her license, job, goes to jail and you're facing lawsuits.  Or maybe one of your parents ends up really sick and needs someone to take care of them.  Or a tornado wipes out your entire house and you're literally on the street tomorrow morning.

http://www.mrmoneymustache.com/2012/04/18/news-flash-your-debt-is-an-emergency/

So if you still have a car loan, credit card, department store or even a student loan debt, you should destroy that as a prerequisite to beginning the more relaxed stage of saving for financial independence. At the later stages, you can start to take it easy, but right now is the time for some hard work. Depending on your life situation, you might decide to go car-free, live with roommates, eat a vegetarian diet, take on extra jobs, delay parenthood, enjoy only local travel, and do any number of other things to get the job done. This stage will be short and effective.

Then I’ll see you at the next stage, which is really where this more advanced blog begins.

[big_owl]

I would personally knock out the loans with the E-fund and rebuild it over the next few months. It depends on what you are comfortable with, how secure your jobs are and how flexible your financial position is in case of an emergency.

+1

Your debt is an emergency.

I don't have any vested interest in this so really don't care what path they choose, but how is $11k in loans that will be paid off in 4mo (with "plenty of spare in our budget") at 2-3% an emergency?  It's not even close to an emergency.

An emergency is getting t-boned while bicycling to work tomorrow morning, dissolving both of your legs so you can't walk or work for several months and get stuck on disability.  Or getting into a bad car accident with same results, or having sudden cardiac arrest or a stroke or maybe your spouse makes a stupid decision and drives drunk and runs a kid over and loses her license, job, goes to jail and you're facing lawsuits.  Or maybe one of your parents ends up really sick and needs someone to take care of them.  Or a tornado wipes out your entire house and you're literally on the street tomorrow morning.

http://www.mrmoneymustache.com/2012/04/18/news-flash-your-debt-is-an-emergency/

So if you still have a car loan, credit card, department store or even a student loan debt, you should destroy that as a prerequisite to beginning the more relaxed stage of saving for financial independence. At the later stages, you can start to take it easy, but right now is the time for some hard work. Depending on your life situation, you might decide to go car-free, live with roommates, eat a vegetarian diet, take on extra jobs, delay parenthood, enjoy only local travel, and do any number of other things to get the job done. This stage will be short and effective.

Then I’ll see you at the next stage, which is really where this more advanced blog begins.

Where does he say to spend all your emergency reserves on a student loan with a 1-2% spread over savings interest rate?

[Loud Noises]

I appreciate the viewpoints.  While reading, it finally clicked that I can and should be doing a concrete risk/reward breakdown on this.  When I crunch the numbers, it will cost me roughly $40 extra to keep an E-fund and pay down the debt over 4 months.  Sometimes I get caught up in doing the most efficient thing possible, but in this case I really don't see the risk being worth it for $40.  Even if I have one night of losing sleep over it, I'd rather have kept the E-fund for the additional cost.  Knowing myself, I'll probably have at least one night of worry if we don't have a cash cushion. 

[patchyfacialhair]

Double your numbers and that's where we're at. After talking about it, we decided to just throw 3k/month at the debt until it's paid off in about 6-7 months. We figure our 6 month emergency fund is fully funded at this point so to drain that would be kind of a drag. As you said, the actual interest cost to you is minimal, so it depends on what you decide.

[big_owl]

I appreciate the viewpoints.  While reading, it finally clicked that I can and should be doing a concrete risk/reward breakdown on this.  When I crunch the numbers, it will cost me roughly $40 extra to keep an E-fund and pay down the debt over 4 months.  Sometimes I get caught up in doing the most efficient thing possible, but in this case I really don't see the risk being worth it for $40.  Even if I have one night of losing sleep over it, I'd rather have kept the E-fund for the additional cost.  Knowing myself, I'll probably have at least one night of worry if we don't have a cash cushion.

Bravo, cool heads prevail.  You're making the right choice.