Author Topic: Do you carry an Emergency Fund? (While paying off debt)  (Read 5591 times)

SingleMomDebt

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Do you carry an Emergency Fund? (While paying off debt)
« on: June 20, 2014, 12:44:37 PM »
Goal: to always keep $1K in my EF.

Current: I transfer $150/mth until I reach $1K. Then after reaching that goal, the money will be added to my current debt repayment funds.

But... Recently, I received a recommendation to throw my EF towards debt.

How I feel: I'm a single mom with 2 teens. Not sure I want be without an EF. It's a bit of a security blanket.

So I want to know.... Do you carry an Emergency Fund?

« Last Edit: June 20, 2014, 01:00:32 PM by singlemomdebt »

Doomspark

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Re: Do you carry an Emergency Fund?
« Reply #1 on: June 20, 2014, 12:53:42 PM »
Absolutely.

I currently have enough in mine to cover us for about six weeks.  I'd like to have double that.  Right now, I put a minimum into savings and am focusing on paying down debt.  Once the debt is retired, I'll build the emergency fund up.

Glenstache

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Re: Do you carry an Emergency Fund?
« Reply #2 on: June 20, 2014, 12:59:54 PM »
Yes. An emergency fund adequate to cover those items that would have to be paid cash or other than credit card (rent, etc). To some extent, your line of credit is also a security blanket. So, keep enough out to provide quick-access buffer for things that would have to be paid as cash (or would incur fees to you beyond normal CC interest), but the rest should go to paying down your debt. The actual amount of that fund will depend on your specific budget.

Exflyboy

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Re: Do you carry an Emergency Fund?
« Reply #3 on: June 20, 2014, 01:05:37 PM »
I have a different take.

You are basically paying to borrow your own money for something you may never need.

put it this way, you have (I assume) CC debt or a Home equity line of credit?

Presumably you can borrow against these vehicles (HELOC before the CC is possible) if you HAD to?

if this is the case i would pay down my debt (highest interest rate loan first) a fast as i could.. then add to the EF.

After you got the emergency fund then start saving.

Frank

shotgunwilly

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Re: Do you carry an Emergency Fund?
« Reply #4 on: June 20, 2014, 01:07:25 PM »
I can't see cutting your monthly expenses so close that you don't have ANY room to budge in your account, therefor I think you should always have atleast that much ($1000) accessible at all times.  I definitely would not put that towards a debt.

frugaliknowit

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Re: Do you carry an Emergency Fund? (While paying off debt)
« Reply #5 on: June 20, 2014, 01:09:47 PM »
Depending on how much debt you have relative to your income and what the average interest rate is and how secure your job is, you might want to blend paying off debt and adding to the emergency fund.  The important thing is you are "digging out".  More details would help (income/debt with %rates).

Exflyboy

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Re: Do you carry an Emergency Fund?
« Reply #6 on: June 20, 2014, 01:21:59 PM »
I can't see cutting your monthly expenses so close that you don't have ANY room to budge in your account, therefor I think you should always have atleast that much ($1000) accessible at all times.  I definitely would not put that towards a debt.

But if you could borrow it at a moments notice if you had to.. why wouldn't you?

Frank

CestMoi

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Re: Do you carry an Emergency Fund? (While paying off debt)
« Reply #7 on: June 20, 2014, 01:26:27 PM »
Yes indeed I do. I have a 6-month expense cushion in my emergency fund, and I'm still adding to it (I recently paid off my mortgage, so I needed to "borrow" some of it). I like having about an 8-12 months' cushion in there.

shotgunwilly

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Re: Do you carry an Emergency Fund?
« Reply #8 on: June 20, 2014, 01:34:55 PM »
I can't see cutting your monthly expenses so close that you don't have ANY room to budge in your account, therefor I think you should always have atleast that much ($1000) accessible at all times.  I definitely would not put that towards a debt.

But if you could borrow it at a moments notice if you had to.. why wouldn't you?

Frank

I don't think this is a bad idea when you don't have debt, or instead of say, a $5000 or greater emergency fund.  But not even having a $1000 buffer in cash?  Budgets get broken sometimes, $1000 isn't even a very large buffer.  That shouldn't be hard to keep, and it's not going to make a big difference in debt repayment.  Why pay the $1000 into a debt, then charge the emergency on credit, and have it in debt again?

Numbers Man

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Re: Do you carry an Emergency Fund? (While paying off debt)
« Reply #9 on: June 20, 2014, 01:35:23 PM »
I don't see a problem with keeping a $1,000 liquid as an emergency fund as you're trying to pay off debt. Shit happens and having cash handy is helpful.

neo von retorch

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Re: Do you carry an Emergency Fund? (While paying off debt)
« Reply #10 on: June 20, 2014, 01:38:34 PM »
"How I feel: I'm a single mom with 2 teens. Not sure I want be without an EF. It's a bit of a security blanket. "

Honestly, I think this is an important one. You might save some money long-term if nothing goes wrong, depending on the interest rate of your debt, by paying it off early with your EF. But how are you going to feel not having that safety net?

(Now, paying off debt has a good feeling, too, but in some ways it is very "short-lived." You make the payment, and you jump up and down, but the joy fades. The security of savings kind of hangs in the background, comforting you.)

For now, $1000 is a good EF, and once you get your debt emergency taken care of, consider growing the EF to cover 6 months of expenses (particularly if it helps you sleep at night!)

Exflyboy

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Re: Do you carry an Emergency Fund?
« Reply #11 on: June 20, 2014, 01:45:42 PM »
I can't see cutting your monthly expenses so close that you don't have ANY room to budge in your account, therefor I think you should always have atleast that much ($1000) accessible at all times.  I definitely would not put that towards a debt.

But if you could borrow it at a moments notice if you had to.. why wouldn't you?

Frank

I don't think this is a bad idea when you don't have debt, or instead of say, a $5000 or greater emergency fund.  But not even having a $1000 buffer in cash?  Budgets get broken sometimes, $1000 isn't even a very large buffer.  That shouldn't be hard to keep, and it's not going to make a big difference in debt repayment.  Why pay the $1000 into a debt, then charge the emergency on credit, and have it in debt again?

If you could'nt borrow it at a moments notice I would agree.. But lets say for example you currently have $1000 in CC debt at say 15% APR.

So if you keep that balance (ignoring late fees) you pay $150 a year to service that debt.. But your adding the money to an EF.. Well itf that takes a year then you have a cost of $150 for the privilage of borrowing your OWN money!


Ok so now lets say you start paying it off instead... Ok you won't save the whole $150 but you will pay much less in interest.

Now lets say after 8 months the washing machine dies (Ok I'd go to the laundry mat before I bought a new washer I couldn't afford, but ignoring that part).. Oh my! you buy a REALLy expensive washer for $800 on the same CC.

Well now your back where you started at a balance of $1000.. but wait your NOT.. because you have not been paying all that interest while you have been paying it off.

So your money ahead and you still have access to the funds whenever you need them.

In this case as long as you have access to the credit there is money to be saved (the washing machine might not break after all) and you save on interest payments.

As Spock would say.. "Its not logical"!!

Frank

Exflyboy

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Re: Do you carry an Emergency Fund? (While paying off debt)
« Reply #12 on: June 20, 2014, 01:49:49 PM »
Back to the question.. yes I do have an emergency fund.. but ONLY because.. I am not in debt and my money is mostly invested it stocks.

Sure I could sell them whenever I wanted but I don't want to have to sell them at the market bottom.. Hence I don't have immediate access to cash. so I keep some in my checking account.


KittyFooFoo

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Re: Do you carry an Emergency Fund? (While paying off debt)
« Reply #13 on: June 20, 2014, 02:08:55 PM »
Highly situational, I think.

We (married, one child) are in an unusual high cash flow/huge debt situation, paying off $178k in student loans with $144k in gross income.  We keep a $20,000 emergency fund (would cover us for 6 months in case of dual job loss).  My job is great, but I could plausibly be laid off at any time.  Having this insurance policy against a dual job loss disaster is very important for my peace of mind, especially since we will be paying off debt for a period of years.  To me, the extra interest we paid while building our E-fund is well worth 3-5 years of improved sanity.

nordlead

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Re: Do you carry an Emergency Fund? (While paying off debt)
« Reply #14 on: June 20, 2014, 02:17:16 PM »
liquidity has its benefits.

Lets say you have $0 in your bank account and the paycheck from the company is 2-3 days late. You have a $600 rent bill due. You'd then have to take a cash advance, which may charge 5% of the amount, AND the 20% APR. Other bills may cause late fees, bounced checks, etc... all costing you money.

$1k in a bank account is not a bad idea. If we were talking having $10k in EF with $8k in CC debt, I'd say you are being stupid, but $1k to smooth over bumps in the road isn't that much and doesn't cost that much to finance. Yes, the odds of a paycheck being late should be low (I think it happened once to me since I graduated undergrad, or 0.5% chance), but there are other situations that require cash that would prevent you from having to take a cash advance.

Yes, odds are keeping $0 in EF is optimal, but you say you'll sleep better at night with $1k in EF, then go for it.

Exflyboy

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Re: Do you carry an Emergency Fund? (While paying off debt)
« Reply #15 on: June 20, 2014, 02:17:22 PM »
Highly situational, I think.

We (married, one child) are in an unusual high cash flow/huge debt situation, paying off $178k in student loans with $144k in gross income.  We keep a $20,000 emergency fund (would cover us for 6 months in case of dual job loss).  My job is great, but I could plausibly be laid off at any time.  Having this insurance policy against a dual job loss disaster is very important for my peace of mind, especially since we will be paying off debt for a period of years.  To me, the extra interest we paid while building our E-fund is well worth 3-5 years of improved sanity.

Situational I would agree.

Now if you owned a house and you have spare equity.. well then you could get a HElOC for $20k... You wouldn't pay anything unless you actually borrow money.

Well then you could pay that $20k in savings to your student debt (it may not make sense if it is deffered interest of course) and save some interest payments.

i would argue that you would be in no worse position but saving yourself quite a bit of money.

I think we can confuse the FEELING of security vs real security.

This is cool, I am the only contrarian on this thread..:)

Frank

shotgunwilly

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Re: Do you carry an Emergency Fund?
« Reply #16 on: June 20, 2014, 02:25:10 PM »
If you could'nt borrow it at a moments notice I would agree.. But lets say for example you currently have $1000 in CC debt at say 15% APR.

So if you keep that balance (ignoring late fees) you pay $150 a year to service that debt.. But your adding the money to an EF.. Well itf that takes a year then you have a cost of $150 for the privilage of borrowing your OWN money!


Ok so now lets say you start paying it off instead... Ok you won't save the whole $150 but you will pay much less in interest.

Now lets say after 8 months the washing machine dies (Ok I'd go to the laundry mat before I bought a new washer I couldn't afford, but ignoring that part).. Oh my! you buy a REALLy expensive washer for $800 on the same CC.

Well now your back where you started at a balance of $1000.. but wait your NOT.. because you have not been paying all that interest while you have been paying it off.

So your money ahead and you still have access to the funds whenever you need them.

In this case as long as you have access to the credit there is money to be saved (the washing machine might not break after all) and you save on interest payments.

As Spock would say.. "Its not logical"!!

Frank

First, you're assuming that the $1000 credit is not getting paid down AT ALL throughout the entire year.
Second, if they couldn't pay off that debt in a year, what makes you think they could pay the washing machine debt off throughout the next year?

The difference is going to be negligible. I say do what makes you comfortable, but not having $1000 over normal expenses is kinda crazy to me.

Hugerat

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Re: Do you carry an Emergency Fund? (While paying off debt)
« Reply #17 on: June 20, 2014, 02:41:04 PM »
I never understood the purpose of an emergency fund. Can't you just carry an extra $1,000 in your checking account if you need roughly that much as a monthly buffer against variable expenses? If this money is not needed to pay current living expenses then put it toward your debt. The interest on your debt is almost certainly higher than what you would earn on the $1,000 in a savings account and you will be rid of it sooner.

As for racking up 6 months or more in living expenses, good lord is that a lot of money to have earning no return. People do know that if you sweep money into mutual funds it is not gone, right? You do still have access to it and it will be productive for you as opposed to being slowly eroded by inflation. If you have an emergency it is still there.

gillstone

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Re: Do you carry an Emergency Fund? (While paying off debt)
« Reply #18 on: June 20, 2014, 02:46:30 PM »
As long as we have a mortgage, it will be autopayed from a savings account with a large enough balance to make 6 months of payments without any other contributions.  Its the peace of mind my wife needed to allow me to put our other savings (non 401k IRA etc) in a Vanguard brokerage account.

CestMoi

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Re: Do you carry an Emergency Fund? (While paying off debt)
« Reply #19 on: June 20, 2014, 03:37:23 PM »
I live in a high cost area and I've been laid off three times in my career, for about one and one-half years each time (that's how long it took to get a comparable job), and that 6-8 months' expenses helps me relax. Not that my monthly expenses are really that high; honestly, I got along fine with what I got from unemployment. But I also use the expense fund to fund stock purchases, so the amount waxes and wanes. But I probably could put half of it into the market and still be as relaxed.

Glenstache

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Re: Do you carry an Emergency Fund? (While paying off debt)
« Reply #20 on: June 20, 2014, 03:52:02 PM »
Really, this seems to be more an insurance concept. There is an opportunity cost to having an emergency fund, which is calculated as an estimate of what the money *could* be doing if it were not kept handy and liquid. That opportunity cost is effectively the cost of the insurance of having that money on hand. The tradeoff is what the penalty for not having that money available when needed is vs the cost of keeping it liquid. If it costs $150 a year (number from hypothetical CC interest rate above), but it insures against missing rent (instance of paycheck coming in late) it could be a good decision on purely financial terms if that has bad consequences. Insure against what you cannot afford to lose.

Life is typically more gray than a spreadsheet, though. I think the cost-benefit analysis should dictate the range of appropriate slush funds to keep liquid based on month to month expenses and transactions. But, we also need to be able to sleep well at night and if the opportunity cost of the larger emergency fund provides is worth it, then that is okay, but ultimately a personal decision.

I think the takeaway for me from this thread is to really calculate what the appropriate amount is, and will probably move some of my e-fund into a mutual fund or something that would allow access in a 48 hour period.  I had personally gone with the default 6-month approach, but this thread has shifted my thinking a bit.

Exflyboy

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Re: Do you carry an Emergency Fund? (While paying off debt)
« Reply #21 on: June 20, 2014, 06:45:05 PM »
Really, this seems to be more an insurance concept. There is an opportunity cost to having an emergency fund, which is calculated as an estimate of what the money *could* be doing if it were not kept handy and liquid. That opportunity cost is effectively the cost of the insurance of having that money on hand. The tradeoff is what the penalty for not having that money available when needed is vs the cost of keeping it liquid. If it costs $150 a year (number from hypothetical CC interest rate above), but it insures against missing rent (instance of paycheck coming in late) it could be a good decision on purely financial terms if that has bad consequences. Insure against what you cannot afford to lose.

Life is typically more gray than a spreadsheet, though. I think the cost-benefit analysis should dictate the range of appropriate slush funds to keep liquid based on month to month expenses and transactions. But, we also need to be able to sleep well at night and if the opportunity cost of the larger emergency fund provides is worth it, then that is okay, but ultimately a personal decision.

I think the takeaway for me from this thread is to really calculate what the appropriate amount is, and will probably move some of my e-fund into a mutual fund or something that would allow access in a 48 hour period.  I had personally gone with the default 6-month approach, but this thread has shifted my thinking a bit.

Exactly.. In days gone by I had a HELOC that was set up as an overdraft permission on my account.... If I had a big bill to pay I could simply pull cash or write a check/debit card to my account and the fee would be the interest on the HELOC, no overdraft fees or anything.

As this money was instantly available it was exactly the same as having an EF but without the opportunity cost you describe.

Bottom line it is a small amount, and if the OP is not comfortable then by all means have the EF.

Frank

SingleMomDebt

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Re: Do you carry an Emergency Fund?
« Reply #22 on: June 21, 2014, 12:30:17 AM »
Absolutely.

I currently have enough in mine to cover us for about six weeks.  I'd like to have double that.  Right now, I put a minimum into savings and am focusing on paying down debt.  Once the debt is retired, I'll build the emergency fund up.

that's is pretty much my thinking too. thank you for sharing Doomspark.

I have a different take.

You are basically paying to borrow your own money for something you may never need.

put it this way, you have (I assume) CC debt or a Home equity line of credit?

Presumably you can borrow against these vehicles (HELOC before the CC is possible) if you HAD to?

if this is the case i would pay down my debt (highest interest rate loan first) a fast as i could.. then add to the EF.

After you got the emergency fund then start saving.

Frank

I did think about that option, too. No line of Home equity, but a line of credit I do. However, I am not the best with CCs. I have gotten much better. But am afraid that IF something happened and I had to borrow against it, I put myself back in the same place as before.

SingleMomDebt

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Re: Do you carry an Emergency Fund? (While paying off debt)
« Reply #23 on: June 21, 2014, 12:36:03 AM »
I don't think this is a bad idea when you don't have debt, or instead of say, a $5000 or greater emergency fund.  But not even having a $1000 buffer in cash?  Budgets get broken sometimes, $1000 isn't even a very large buffer.  That shouldn't be hard to keep, and it's not going to make a big difference in debt repayment.  Why pay the $1000 into a debt, then charge the emergency on credit, and have it in debt again?

Yes, that is one of my concerns about needing to charge a (potential) emergency putting myself back in debt again.


Highly situational, I think.

We (married, one child) are in an unusual high cash flow/huge debt situation, paying off $178k in student loans with $144k in gross income.  We keep a $20,000 emergency fund (would cover us for 6 months in case of dual job loss).  My job is great, but I could plausibly be laid off at any time.  Having this insurance policy against a dual job loss disaster is very important for my peace of mind, especially since we will be paying off debt for a period of years.  To me, the extra interest we paid while building our E-fund is well worth 3-5 years of improved sanity.

And peace of mind is a really nice thing to have. So is sanity. If it was just me, I would be fine. With children, I think it adds a different paradigm. At least in my opinion. 

SingleMomDebt

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Re: Do you carry an Emergency Fund? (While paying off debt)
« Reply #24 on: June 21, 2014, 12:52:47 AM »
What I am really enjoying is the many different views being shared. Thank you. Because some of these are beyond my immediate financial thought process. It helps me to expand my way of thinking.

As for what I am going to do... I have a small balance left on one of my CCs. I think I am going be a bit risky and pay it off by the end of this month. Thus relying on my CC for the next few months to cover potential emergencies.

But during the next 6 months I will build the EF back up again. But now the CC payment will be snowballed into last CC to pay off (which I have 11 months to pay off with 0% APR). And I am kind of excited about that.

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Re: Do you carry an Emergency Fund? (While paying off debt)
« Reply #25 on: June 21, 2014, 02:37:29 AM »
I keep my EF in a 100% offset account on my home loan. Best of both worlds

wtjbatman

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Re: Do you carry an Emergency Fund? (While paying off debt)
« Reply #26 on: June 21, 2014, 03:02:32 AM »
Try asking this question on the Personal Finance Subreddit. Internet a splode.