Author Topic: Debt pay-down, or Emergency Fund?  (Read 10216 times)

MrMook

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Debt pay-down, or Emergency Fund?
« on: October 06, 2013, 07:43:47 PM »
Hey gang!
I've been poring over the site for the past few months, and getting VERY excited about getting rid of debt, and becoming financially independent. I've been carefully introducing some of the core Mustachian ideas to my wife, who is a bit hesitant, but she's generally on board. As most of you may know, this can be a very scary thing to undertake. We've started with our food and phone expenses, and we're selling a bunch of useless crap on CL, and throwing that income directly at debt.

The biggest question I have at this point, is where to concentrate our money first. I wont get into our specifics in this post (working on a more detailed financial profile for a later post), but essentially, we're back to living "paycheck to paycheck" with a 6 month old baby. We knew raising a child would cost money, but we certainly underestimated how much. Especially in the childcare department. Our jobs are fairly stable right now, but I'm working on an escape plan from my ad agency job that will nix child care costs, and increase income all in one go (if all goes well).
Our savings is in the $2K range right now.

But I digress...the big question:
Do we bother taking the time to build an "emergency fund", or should we get cracking on our credit card debt? We have about $8000 in that category, and I want it GONE.

steveo

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Re: Debt pay-down, or Emergency Fund?
« Reply #1 on: October 06, 2013, 07:51:43 PM »
I think get rid of the credit card debt first.

swick

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Re: Debt pay-down, or Emergency Fund?
« Reply #2 on: October 06, 2013, 08:14:21 PM »
Welcome to the forums!

It all depends on your comfort level and a variety of other factors you have not gone into. With a new baby and with already underestimating the expenses, having a larger emergency fund would be how I would go - but again, depends on things like medical coverage, ages of vehicles, if you own or rent, and have any other contingency funds set up.

Also how much credit you have access to, a popular thought is to have access to credit has your emergency fund. I think this isn't a bad way to go if you are already somewhat established but just starting out there is the bigger chance for more to go wrong.

You can pretty much guarantee that something will go wrong, it is just a matter of when. if by throwing everything at your card leaves you unable to pay for something unexpected comes up then you will just put it on your card and increase the balance, have a couple of problems in a short amount of time and you could be in big trouble.

Oh and if you are looking at nixing your job and (I'm guessing) consulting or freelancing, you might be taking a hit in the medical/insurance coverage and you would want some extra in the bank if you will be loosing benefits.


enpower

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Re: Debt pay-down, or Emergency Fund?
« Reply #3 on: October 06, 2013, 08:34:41 PM »
Get rid of the credit card debt! The interest rate is probably somewhere between 10-20%.

I never see the point building up savings if you have debt.

People will tell you build up the emergency fund in case you have unexpected bills, but if you pay back the credit card, you can always put some emergency purchases on the credit card at worst case.

You are not going to get ahead building up a few thousand dollars in a savings account paying 0-3% interest when you have huge credit card interest.

You could even consider a debt consolidation loan and pay a lower interest rate. Just make sure you can pay back extra amounts and not get penalised for it.

MrMook

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Re: Debt pay-down, or Emergency Fund?
« Reply #4 on: October 06, 2013, 08:53:13 PM »
Thanks for the replies. I feel as divided as you guys :)

Seems like a catch 22. If I build an emergency fund, interest on my debt accrues, and I technically lose some of that fund by not focusing on the debt. If I pay dow the debt, and use the freed-up credit as my fund, any kink in the works sends me back into a debt pile to start over again, possibly negating any interest savings I may have made by paying down the original debt.

My wife's angle is to build an emergency fund first, but I'm leaning towards a full attack on the most interest-y debt. Seems like either option is as good as the other in the long run, so we'll just keep on trucking with the reduced spending, which is the only way to start anyway. We are currently selling a bunch of stuff on CL, and throwing that money directly at our highest interest credit card, though.

Enpower, the debt consolidation loan is an option I hadn't thought of, but I'm going to shop around for rates. Thanks for the idea.

On the job situation: Yes, health care is a big concern. We had been covered by my employers plan, but my wife then got a job with the state, which offers a better, more affordable plan, so we switched the family to hers, since she plans to stay there. Now the only benefits at my current job that I participate in is a 401K matching program, which is great, and I'm maxing it out while I can. They match up to 5%, and I currently put in 10%.

The plan with leaving my job is to start on a few of my own projects, while drastically reducing our day care costs. Phase I would be freelancing in my current field, which I've been successful at before, and could move back into fairly quickly. Phase II of is to begin development on an app/service idea I have. Its somewhat related to being a badass and saving money, but more on that when its more reality, and less pipe dream.
« Last Edit: October 06, 2013, 08:58:32 PM by MrMook »

apennysaved

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Re: Debt pay-down, or Emergency Fund?
« Reply #5 on: October 06, 2013, 09:09:47 PM »
I think a $2K beginner emergency fund could handle most emergencies (other than a job loss) such as a car issue or appliance break down.  So, I would focus on pay down of credit cards.  If you do have an emergency, stop extra payments on the credit card, and refill the $2K emergency fund then focus back on the credit cards.  You could also temporarily put just 5% in your 401K to get the max match and add the extra take home to your credit card payments.

lentilman

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Re: Debt pay-down, or Emergency Fund?
« Reply #6 on: October 06, 2013, 09:31:39 PM »
Disagree with most of the other posters.

Build up the emergency fund first.  At least to 5$K or so. The primary responsibility you have is to your kid - make sure they have a stable environment.  Then focus on paying down the debt.

lentilman

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Re: Debt pay-down, or Emergency Fund?
« Reply #7 on: October 06, 2013, 09:41:34 PM »
If you were single, or DINK I would be fine with attacking the credit cards first.  BUT with a young kid, your primary focus HAS to be on providing a rock stable foundation.  That young life is totally in your hands.  Make sure you can sustain a job loss or unexpected health emergency without disrupting the kid's life.

I suppose it depends on the support system that you have.  I had none to fall back on when at a similar point.  But speaking from personal experience you have to have a ROCK SOLID foundation for the kid's sake.

MrMook

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Re: Debt pay-down, or Emergency Fund?
« Reply #8 on: October 06, 2013, 10:03:59 PM »
I agree 100% about putting my son as a first priority. No question. In fact, this is really all for him. My quest to be debt free has been fueled by his arrival. I've done some self-inflicted face-punching (and he's getting good at face punching and hair pulling, which I deserve) for not having put my finances in order 10 years ago when it would have been easier. But now that he's here, I'm more motivated than ever to leave the rat race so we can spend our time with him instead of battling debt for the next 30 years. Our debt is large (don't EVER go to law school), but I think we can crawl back into the black in 10 years easily. Right now, we're just getting started. Making plans, and putting them into action.

Support system is limited. We moved to NYC to chase careers, and our parents both live 4 hours upstate. Not exactly easy to get grandma over to babysit (although one of them did volunteer a week this summer at a cost to her PTO at her job). The NYC situation is a sticky point in our planning as well. Salaries are great and there's plenty of work so far, and our rent is actually remarkably low ($1100, 1br with backyard, all utilities included except internet), but taxes and other costs are high. Again, childcare is a major issue here, especially with no family network nearby. Moving is a strong possibility in the next year or two, but for now we're here.

steveo

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Re: Debt pay-down, or Emergency Fund?
« Reply #9 on: October 06, 2013, 10:38:26 PM »
Sorry I don't get the idea of building up an emergency fund. If the credit card is paid off you can always draw on that. To add to that the credit card is costing you a lot more than any emergency fund will make you.

Paying off the credit-card first is a win-win situation.

Will

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Re: Debt pay-down, or Emergency Fund?
« Reply #10 on: October 07, 2013, 12:46:15 AM »

lentilman

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Re: Debt pay-down, or Emergency Fund?
« Reply #11 on: October 07, 2013, 04:05:56 AM »
Sorry I don't get the idea of building up an emergency fund. If the credit card is paid off you can always draw on that.

External credit lines are always subject to being yanked. 

Speaking as one who has had to weather several emergencies over the years, I don't get the idea of not having an emergency fund.

NinetyFour

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Re: Debt pay-down, or Emergency Fund?
« Reply #12 on: October 07, 2013, 04:52:17 AM »
Why don't you compromise and split the extra money--part goes to CC debt and part goes to EF?

Charlotte

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Re: Debt pay-down, or Emergency Fund?
« Reply #13 on: October 07, 2013, 05:46:29 AM »
How about a little bit of both? Save a $500 EF, then pay off $2000. Then save another $500, pay off $2000.

Etc., etc., etc....

MorningCoffee

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Re: Debt pay-down, or Emergency Fund?
« Reply #14 on: October 07, 2013, 06:39:10 AM »
I agree 100% about putting my son as a first priority. No question. In fact, this is really all for him. My quest to be debt free has been fueled by his arrival. I've done some self-inflicted face-punching (and he's getting good at face punching and hair pulling, which I deserve) for not having put my finances in order 10 years ago when it would have been easier. But now that he's here, I'm more motivated than ever to leave the rat race so we can spend our time with him instead of battling debt for the next 30 years. Our debt is large (don't EVER go to law school), but I think we can crawl back into the black in 10 years easily. Right now, we're just getting started. Making plans, and putting them into action.

Support system is limited. We moved to NYC to chase careers, and our parents both live 4 hours upstate. Not exactly easy to get grandma over to babysit (although one of them did volunteer a week this summer at a cost to her PTO at her job). The NYC situation is a sticky point in our planning as well. Salaries are great and there's plenty of work so far, and our rent is actually remarkably low ($1100, 1br with backyard, all utilities included except internet), but taxes and other costs are high. Again, childcare is a major issue here, especially with no family network nearby. Moving is a strong possibility in the next year or two, but for now we're here.

I'm not sure what your plans are to work as a freelancer and take care of your son at the same time. Caring for a child is a full-time job in itself, especially if your support system is limited as you say. It's hard to focus on a job with an active toddler hanging off your leg...

MrMook

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Re: Debt pay-down, or Emergency Fund?
« Reply #15 on: October 07, 2013, 08:04:09 AM »
I'm not sure what your plans are to work as a freelancer and take care of your son at the same time. Caring for a child is a full-time job in itself, especially if your support system is limited as you say. It's hard to focus on a job with an active toddler hanging off your leg...

Parenting during the day (with very limited work bandwidth, maybe some phone calls or emails while he sleeps), then around 5 when my wife comes home, I'd switch into work mode until 10 or 11. I'd have a babysitter set up for the occasional days when I'd need to be on-site for meetings and such. The way I'm setting up this operation, and the type of work I'll be doing will be a little more flexible, so I can move around my time blocks. At least, thats the idea.

It will be hard for a while, but our current situation is super stressful and expensive, and even though I'd be working in the evenings, my wife and I would both get to spend more time with him than ever before. All while nearly eliminating child care costs/stresses.

Frankies Girl

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Re: Debt pay-down, or Emergency Fund?
« Reply #16 on: October 07, 2013, 09:28:47 AM »
Disagree with most of the other posters.

Build up the emergency fund first.  At least to 5$K or so. The primary responsibility you have is to your kid - make sure they have a stable environment.  Then focus on paying down the debt.

This. +1

If you don't have an emergency fund... where do you think that money will come from in an emergency? That's right, charge it right back onto that card! Debt cycle is guaranteed if you don't avoid that.

Build up a decent EF, pay the minimums you can make on the cards and then hit the debts as hard as you can once you have a good cushion.

And I'm wondering how you estimated how much it cost to have a kid... are you sure there aren't some silly things you're spending money on because they're cute, or someone said you had to have them or some other equally money-wasting thing? If you have a ton of baby things scattered throughout the house (like the bumbo seats... honestly? Those are a scam and actually hurt a baby's ability to develop the correct muscles needed for sitting on their own) then you've been had by the baby industry - they're as bad if not worse than the wedding industry. Sell that stuff off to the baby retail/resale shops and try to keep a sharp eye out for the "must have" crap that are really just junk.
« Last Edit: October 07, 2013, 09:40:08 PM by Frankies Girl »

RobertBirnie

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Re: Debt pay-down, or Emergency Fund?
« Reply #17 on: October 07, 2013, 10:01:22 AM »

As a slightly different take that hasn't been mentioned. First, I would have a small emergency fund of 2k or so just as a buffer. But if you might need to rely on credit as an emergency fund what you also need to be doing is building stellar credit.

You ideally you want less than 30% of your available credit utilized, so if you are over this amount then its time to open more credit cards or look into a consolidation loan (lending club?). Open one card for your wife and one for you and keep your debt separated under each of your names so that it looks smaller to the credit burrow. Don't put debt in joint accounts, then it'd be a negative for both of you. Only ask for a new credit card once every 6 months for each of you. If you can, play the balance transfer/intro APR game. If you can't at least get an increase your total credit available so it'll help your score over the long run.

Also request credit line increases once per year on all your current accounts (they shouldn't do a credit check if you only ask once a year, if they want to do one then just pass it up, wait a few months and try again). If you do need to rely on credit at sometime in the future as an emergency fund you really need to make your credit looks awesome. This will enable you to open a 0% intro APR account when you really need it.

There's a lot of reading out there on how credit scores work and how to improve one, I'd look into it as much as you can.

Numbers Man

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Re: Debt pay-down, or Emergency Fund?
« Reply #18 on: October 07, 2013, 10:11:16 AM »
Since you're living paycheck to paycheck you need to get a second job and pay off that debt. The interest alone is costing at least $100 bucks a month. You already have $2k in savings, so that will have to do as an EF for the time being.

avonlea

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Re: Debt pay-down, or Emergency Fund?
« Reply #19 on: October 07, 2013, 12:48:45 PM »
I vote for focusing on the emergency fund first.  Maybe you should make a poll. :)

Seriously, though, I sleep better at night knowing we have a safety cushion. 

gimp

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Re: Debt pay-down, or Emergency Fund?
« Reply #20 on: October 07, 2013, 12:52:56 PM »
I would:

- Try to get more work, if possible. But it may add more cost for child care than income, so be careful.

- Build up the emergency fund while paying off debt a bit faster (meaning paying more than the minimum payment). Something like 50/50 split.

- Pay of all the debt when your emergency fund gets to maybe 5K.

Also:

See if you can consolidate the debt! Paying off eight CCs is no good. See if you can roll that into one lower-cost loan.

See if you can sell things you don't need or use. Stuff in your closet you never wear. Whatever you don't need (want != need), see if it'll fetch dollars.

See if you can reduce bills a bit. TV? Phone? Groceries? Whatever you can, even if it means not using your lights as much, dimming your monitor a bit. Every cent for your kiddo!

daverobev

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Re: Debt pay-down, or Emergency Fund?
« Reply #21 on: October 07, 2013, 04:30:32 PM »
If you have access to other funds in an emergency (ie, stocks you can sell to raise cash), kill the credit card debt.

If you have access to a line of credit or home equity line of credit that has room - kill the credit card debt (move money from the lower interest rate to pay off the higher!).

If you have *nothing* - ie you rent, no other assets, no other access to credit then yes, build up a small emergency fund, then kill the credit card debt.

Cancel/suspend anything you can til the credit card debt is gone. But I'd only put 3 months into an emergency fund - bare bones.

Also, if you have nearby parents that you could ask for help *in an emergency* I'd go more after the credit card than the savings.

$8k at 20%... yup. Kill!

MrMook

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Re: Debt pay-down, or Emergency Fund?
« Reply #22 on: October 07, 2013, 08:57:27 PM »
And I'm wondering how you estimated how much it cost to have a kid... are you sure there aren't some silly things you're spending money on because they're are cute, or someone said you had to have them or some other equally money-wasting thing?

The truly unexpected cost was day care once my wife went back to work. I hate paying for it. We feel we're paying the least amount possible in our area for trustworthy care, but it's still very high. High enough that one of us quitting a job to avoid the cost is almost...but not quite...worth it by the numbers.

The baby clutter is there, yes, and while much of it was given to us as gifts, I hate it. That isn't to say we haven't bought anything. But emotions and hormones are a tricky issue that math cannot solve. So I'll just say, we're working on it. And god damn the baby product industry. Corporate or craft, it doesn't matter. A hormonal mother and her money are soon parted, and these vultures know it all too well.

Since you're living paycheck to paycheck you need to get a second job and pay off that debt. The interest alone is costing at least $100 bucks a month. You already have $2k in savings, so that will have to do as an EF for the time being.

I do a small amount of freelance work on the side, but, admittedly, I haven't been using it as the debt-destroying bazooka that it should be. This is all changing. I'm new here, and I'm learning a great many hard lessons. I'll get there.


Back on the main topic at hand: I appreciate all the advice from everyone. Seriously, you all have great points. There is much I can learn from you lot. I'm going to roll this advice into our financial planning, and see what the Mrs. and I can agree on. I have a strong feeling we'd both be comfortable with a 3K cash EF, then throwing money hand-over-fist at the debt pile.

Our general plan is to have all our CC debt gone within the year, and all school debt gone within 10. The details of that we're still working out, so thanks again to all for the great ideas.

Will

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Re: Debt pay-down, or Emergency Fund?
« Reply #23 on: October 07, 2013, 09:22:58 PM »
You should go check out http://www.whatsthecost.com/snowball.aspx and plug in your numbers so you can see what it all looks like.

MrMook

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Re: Debt pay-down, or Emergency Fund?
« Reply #24 on: October 07, 2013, 09:29:32 PM »
^^^ MIND = BLOWN

Thank you for that. It's both horrifying and inspirational at the same time.

Will

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Re: Debt pay-down, or Emergency Fund?
« Reply #25 on: October 07, 2013, 10:07:19 PM »
You're welcome.

It is very powerful.  It helped motivate me! 

seattlecyclone

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Re: Debt pay-down, or Emergency Fund?
« Reply #26 on: October 08, 2013, 07:41:21 PM »
TL;DR version: Skip the emergency fund until your credit cards are paid off, then build up an emergency fund before attacking lower-rate debt.



Long-winded version:

If your credit cards aren't maxed out, I would suggest you just use those as your "emergency" fund. Credit card interest rates are so ridiculous that you're throwing so much money away by not paying them off as fast as humanly possible.

Let's look at a couple of examples. For all of these scenarios, you start with $10k in credit card debt with 15% interest, your savings account pays 0%, and you have $500 per month to allocate between the credit card debt and building up an emergency fund.

Scenario 1 - pay $250/month toward debt until it's gone, save the rest in emergency fund, no emergency happens:
YearCredit card balanceEmergency fund balance
0$10,000$0
1$8,392$3,000
2$6,526$6,000
3$4,360$9,000
4$1,846$12,000
5$0 (yay!)$16,050

Saving into an emergency fund, you pay off the credit card debt in about 4.5 years, and collect $16k of savings.

Scenario 2 - pay $500/month toward debt until it's gone, then build an emergency fund, no emergency happens:
YearCredit card balanceEmergency fund balance
0$10,000$0
1$5,177$0
2$0 (yay!)$420
3$0$6,420
4$0$12,420
5$0$18,420

Putting the entire $500 toward debt instead, you pay off the debt in just under two years (instead of over 4.5), and in five years you have an extra $2,370 in the bank compared to if you had paid off the debt less aggressively. This amount could be even more if you invest some of that savings instead of letting it waste away in an interest-free savings account.

"But wait!", you might say. "That's the best case scenario...what if an emergency happens?"

It turns out that you're still better off putting your money toward the credit card debt and just putting any emergency spending on a credit card.

Scenario 3 - pay $250/month toward debt until it's gone, save the rest in emergency fund, a $2,000 emergency happens at the end of Year 1:
YearCredit card balanceEmergency fund balance
0$10,000$0
1$8,392$1,000<-- A $2,000 emergency happened. Good thing you had an emergency fund, right?
2$6,526$4,000
3$4,360$7,000
4$1,846$10,000
5$0 (yay!)$14,050

In this scenario, the debt was paid off in the exact same amount of time as in Scenario 1, and the emergency at the end of Year 1 caused your ending cash balance to be $2k lower than it would have been.

Scenario 4 - pay $500/month toward debt until it's gone, then build an emergency fund, a $2,000 emergency happens at the end of Year 1:
YearCredit card balanceEmergency fund balance
0$10,000$0
1$7,177$0<-- Oh, no! An emergency happened without any cash savings! Guess we have to charge it.
2$1,901$0
3$0 (yay!)$4,040
4$0$10,040
5$0$16,040

Even if unexpected spending rears its ugly head, paying off the credit card as fast as you can still puts you ahead by $1,990 after five years. Not quite as good as the scenario where no emergency happens, but not bad either.

Note that this advice only applies to high-rate debt. If your credit card debt is gone and you're paying off lower-interest loans such as student loans or a mortgage, diverting some cash to an emergency fund makes a lot more sense. It's better to have some savings in that case because the last thing you want to do when you have no credit card debt is to risk getting some.

MrMook

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Re: Debt pay-down, or Emergency Fund?
« Reply #27 on: October 09, 2013, 06:36:08 AM »
Wow. Thank you for taking the time to lay all that out!

Great stuff, everyone. Thank you!

lentilman

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Re: Debt pay-down, or Emergency Fund?
« Reply #28 on: October 09, 2013, 05:43:05 PM »
If you were single, or DINK I would be fine with attacking the credit cards first.  BUT with a young kid, your primary focus HAS to be on providing a rock stable foundation.  That young life is totally in your hands.  Make sure you can sustain a job loss or unexpected health emergency without disrupting the kid's life.

I suppose it depends on the support system that you have.  I had none to fall back on when at a similar point.  But speaking from personal experience you have to have a ROCK SOLID foundation for the kid's sake.

Just thought I'd expand a little after many of the later posts.

Some of the situations that people are considering emergencies aren't emergencies at all.  Broken car?  Cars are mechanical - they will all break.  That's just an unexpected expense.  It's going to happen but you just don't know when.  Same thing with leaky roofs, water heaters, major appliances.  Credit cards are fine for those.

The things I am considering as emergencies are low probability/ high life impact events.  These are things I have gone through, and I'm sure you can think of examples in your own (or extended family) life.

1.  Coming home to no home. (think fire/flood/disaster)  A credit card is fine for a few nights in a hotel, but you are going to need to have first-last-security deposit in cash for a new place ASAP.   

2.  Relative needed serious medical help with a specialist ASAP but insurance eligible doctors had 6-8 week waiting periods.  High rated doc in the area had all-cash practice (no insurance, no credit - pay as you go).  Got help the next day.

3.  Relative called to say that their house was going on the auction block unless back taxes were paid by wire the next day.  I ended up wiring the cash directly to the taxman to stop process.

Basically, when the shit hits the fan everyone will depend on Dad to be able to fix it. 

Now YOU are Dad.   
« Last Edit: October 09, 2013, 05:47:50 PM by lentilman »

daverobev

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Re: Debt pay-down, or Emergency Fund?
« Reply #29 on: October 09, 2013, 07:28:29 PM »
If you were single, or DINK I would be fine with attacking the credit cards first.  BUT with a young kid, your primary focus HAS to be on providing a rock stable foundation.  That young life is totally in your hands.  Make sure you can sustain a job loss or unexpected health emergency without disrupting the kid's life.

I suppose it depends on the support system that you have.  I had none to fall back on when at a similar point.  But speaking from personal experience you have to have a ROCK SOLID foundation for the kid's sake.

Just thought I'd expand a little after many of the later posts.

Some of the situations that people are considering emergencies aren't emergencies at all.  Broken car?  Cars are mechanical - they will all break.  That's just an unexpected expense.  It's going to happen but you just don't know when.  Same thing with leaky roofs, water heaters, major appliances.  Credit cards are fine for those.

The things I am considering as emergencies are low probability/ high life impact events.  These are things I have gone through, and I'm sure you can think of examples in your own (or extended family) life.

1.  Coming home to no home. (think fire/flood/disaster)  A credit card is fine for a few nights in a hotel, but you are going to need to have first-last-security deposit in cash for a new place ASAP.   

2.  Relative needed serious medical help with a specialist ASAP but insurance eligible doctors had 6-8 week waiting periods.  High rated doc in the area had all-cash practice (no insurance, no credit - pay as you go).  Got help the next day.

3.  Relative called to say that their house was going on the auction block unless back taxes were paid by wire the next day.  I ended up wiring the cash directly to the taxman to stop process.

Basically, when the shit hits the fan everyone will depend on Dad to be able to fix it. 

Now YOU are Dad.   

The only comment I would have against what you say is that you are keeping an emergency fund for *other people*. I'm not against helping others out - but if *you* are in debt you need to focus on fixing yourself first, that you may be able to help others in the future.

IMHO the stock market is ok for this - you can keep your money invested - and if a real "SHTF" moment comes, cash out what you need.

This_Is_My_Username

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Re: Debt pay-down, or Emergency Fund?
« Reply #30 on: October 09, 2013, 07:45:51 PM »
Quote
But I digress...the big question:
Do we bother taking the time to build an "emergency fund", or should we get cracking on our credit card debt? We have about $8000 in that category, and I want it GONE.


absolutely pay off the credit card asap.  if there is a genuine emergecy, you can use the credit card to pay for it.

MrMook

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Re: Debt pay-down, or Emergency Fund?
« Reply #31 on: October 09, 2013, 08:18:56 PM »
Lentilman, I understand and appreciate your point. I look at an Emergency Fund as rent and bills for at least a month if I or my wife lose our job, or something catastrophic occurs that requires cash. Since I am the dad, yes, I'd like to have all my bases covered. Right now, our only "cash only" expense is rent, so if we lost a job, we'd still have enough to pay for 2 months rent even now. The rest (food, etc) can go on a card if necessary, I suppose, especially if it's truly an emergency (unlike the frequent and very non-emergency dining out expenses that are currently on the card).

lentilman

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Re: Debt pay-down, or Emergency Fund?
« Reply #32 on: October 10, 2013, 04:38:21 AM »
If you were single, or DINK I would be fine with attacking the credit cards first.  BUT with a young kid, your primary focus HAS to be on providing a rock stable foundation.  That young life is totally in your hands.  Make sure you can sustain a job loss or unexpected health emergency without disrupting the kid's life.

I suppose it depends on the support system that you have.  I had none to fall back on when at a similar point.  But speaking from personal experience you have to have a ROCK SOLID foundation for the kid's sake.

Just thought I'd expand a little after many of the later posts.

Some of the situations that people are considering emergencies aren't emergencies at all.  Broken car?  Cars are mechanical - they will all break.  That's just an unexpected expense.  It's going to happen but you just don't know when.  Same thing with leaky roofs, water heaters, major appliances.  Credit cards are fine for those.

The things I am considering as emergencies are low probability/ high life impact events.  These are things I have gone through, and I'm sure you can think of examples in your own (or extended family) life.

1.  Coming home to no home. (think fire/flood/disaster)  A credit card is fine for a few nights in a hotel, but you are going to need to have first-last-security deposit in cash for a new place ASAP.   

2.  Relative needed serious medical help with a specialist ASAP but insurance eligible doctors had 6-8 week waiting periods.  High rated doc in the area had all-cash practice (no insurance, no credit - pay as you go).  Got help the next day.

3.  Relative called to say that their house was going on the auction block unless back taxes were paid by wire the next day.  I ended up wiring the cash directly to the taxman to stop process.

Basically, when the shit hits the fan everyone will depend on Dad to be able to fix it. 

Now YOU are Dad.   

The only comment I would have against what you say is that you are keeping an emergency fund for *other people*. I'm not against helping others out - but if *you* are in debt you need to focus on fixing yourself first, that you may be able to help others in the future.

IMHO the stock market is ok for this - you can keep your money invested - and if a real "SHTF" moment comes, cash out what you need.

You make an excellent point.  It is an emergency fund for other people (mostly kids and wife, although you can choose to extend help to others depending on circumstances). 

It's the transition from "I have a support system to fall back on" to "I am a support system for my family to fall back on".  I'm just saying that parenthood is the natural threshold to make that transition.




daverobev

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Re: Debt pay-down, or Emergency Fund?
« Reply #33 on: October 10, 2013, 08:00:43 AM »
Heh. And I'm transitioning, ooh, next month. Gulp!