Author Topic: Pay down debt with my emergency fund or stay the course  (Read 2905 times)

GW

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Pay down debt with my emergency fund or stay the course
« on: April 07, 2016, 08:51:44 PM »
I'm struggling with actually pulling the trigger and paying off one of the student loans which would result in me losing my emergency savings or just staying the course and paying $1,000/mo on the balances. Maybe I'm just too paranoid, but I built up the emergency fund for my own comfort. However, paying off the debt is one of my goals. What would you do?

$55K income
$4,400 emergency fund
~$60K in 401K

Student Loans - This is my only debt
$3,579.42 @5.8%
$6,827.88 @ 3.4%
$10,738.13 @ 5.8%

slugline

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Re: Pay down debt with my emergency fund or stay the course
« Reply #1 on: April 07, 2016, 09:52:16 PM »
You didn't mention anything about your expenses, but it sounds like your current job and lifestyle are generating about $1000 surplus per month that could be used towards debt, correct? So the opportunity cost of keeping the emergency fund around is the amount of loan interest that accrues in the time it takes for you to cashflow the equivalent of your $4400 e-fund -- a little over four months. At 5.8% (annualized) this comes out to be around a hundred dollars.

Do you feel that it's worth $100 to you to keep your emergency fund around?
« Last Edit: April 07, 2016, 09:54:19 PM by slugline »

Hotstreak

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Re: Pay down debt with my emergency fund or stay the course
« Reply #2 on: April 07, 2016, 09:59:37 PM »
Great job paying down your loans $1,000/mo!  If I were you, I would keep the emergency fund, mostly because your interest rates aren't very high.  You have your emergency fund for a reason, which is that you don't want to take on new loans or credit card debt if large unexpected expenses come up.  It sounds like that's important to you, so keep it!

former player

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Re: Pay down debt with my emergency fund or stay the course
« Reply #3 on: April 08, 2016, 01:29:20 AM »
If you use your emergency fund to pay off the 5.8% loan 1) you will still have $1k in your emergency fund and 2) you can build the emergency fund back up to its current level in three and a half months.  So what you could do is work out how much interest you will save in those three and a half months and set it against the likelihood of having to use the emergency fund in those three and a half months to see whether or not it is worth it to you to pay the loan now.  It's rather like thinking of those three and a half months of interest as the insurance premium for having the emergency fund to hand.  Would you buy insurance at that rate in order to have the higher emergency fund available to you?  What risks are you running in the next three and a half months?

slappy

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Re: Pay down debt with my emergency fund or stay the course
« Reply #4 on: April 08, 2016, 07:09:11 AM »
I personally just used my efund to pay off some debt. My reasoning is that I have $10k in cash in my Roth IRA that can serve as an efund if absolutely necessary. 

GW

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Re: Pay down debt with my emergency fund or stay the course
« Reply #5 on: April 08, 2016, 07:13:36 AM »
Do you feel that it's worth $100 to you to keep your emergency fund around?

Thanks for the breakdown there, I really hadn't thought of it that way. Yes, I generate $1,000/mo. to pay down debt with my current budget. The emergency fund helps me sleep better at night. However, as former player suggested. Paying it off while still having only $1K in the emergency fund is how I have operated for the last 4 years paying debt down. I built it up b/c of taxes and the upcoming wedding season. I'm standing up in 2 of them and don't want to have to use a credit card to fund those.

For $100 to keep the larger emergency fund seems worth it to me. I don't think I could stomach dipping into retirement money "if" something actually did happen. Thanks for all the input and perspective.

nereo

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Re: Pay down debt with my emergency fund or stay the course
« Reply #6 on: April 08, 2016, 07:17:43 AM »
as SlugLine pointed out, you would save about $100 and loose the security of having an Efund for the amount of time it takes you to build it back up.
Seems like a bit too risky for such a small return.

However, you could 'split the difference' - use ~$1,900 from your Efund to pay down that 5.8% loan while keeping $2,500 in your Efund.  That will save you roughly $50, cut your payoff time about in half and still leave you with enough in your EFund to take care of most bad things that could occur (except extended job loss).

Ultiamtely - up to you.  But I'd take the middle road.

frugaliknowit

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Re: Pay down debt with my emergency fund or stay the course
« Reply #7 on: April 08, 2016, 08:08:55 AM »
My $.02:  If you are currently contributing to the 401k, I would not do so beyond the matched level.  If you currently are, I would stop and apply those funds toward the debt.

neo von retorch

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Re: Pay down debt with my emergency fund or stay the course
« Reply #8 on: April 08, 2016, 08:46:26 AM »
I built up the emergency fund for my own comfort
Quote
paying off the debt is one of my goals
Quote
$55K income
$4,400 emergency fund
~$60K in 401K

Student Loans - This is my only debt
$3,579.42 @5.8%
$6,827.88 @ 3.4%
$10,738.13 @ 5.8%

1) balance security/feelings against goals and best practices. imagine what would happen if you use your emergency fund to pay off debts, but needed the fund for something unexpected?
2) math - are you in the 25% marginal tax bracket? are all your 401K contributions decreasing your tax load? if so, keep getting this! 25% > 5.8%
3) payments and comfort. if you're already $1k+ in surplus per month, you don't need to wipe out those student loan payments right this instant.

What I would do:
Continue to contribute as much as you can towards the 401K (as long as there are tax advantages).
Focus on the smallest 5.8% loan first, as getting rid of that and removing that minimum payment will feel good and help you build momentum.
Hold onto the emergency fund unless you will sleep fine without it.

When I was in your position:
I liked having an emergency fund, but sometimes I just needed to get some debt paid off to feel better, so I'd take a big chunk out of the fund and pay off some debt. Then I'd resume rebuilding the fund to my target. As others have said, maybe $1000 is enough (for now) so consider taking some out of there and getting the debt paid down.

Question: You mentioned weddings? Do you have a separate savings account, or were you planning on tapping the emergency fund? Consider separating these, mentally. An emergency fund should really be just that, for emergencies. If you need to build up savings for events, do that separately.

slugline

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Re: Pay down debt with my emergency fund or stay the course
« Reply #9 on: April 08, 2016, 09:04:56 AM »
+1 on what neogodless says above -- a wedding isn't an emergency, it's just spending. So plan accordingly. I personally didn't see your original e-fund situation as decision to lose sleep over. Either way, if you can maintain a $1000/month paydown rate, you'll have the debt killed in a couple of years. Continue to keep the income up and the expenses down and you'll reach your goals soon enough!