I'm currently trying to build up my emergency fund to $15,000. This fund is to cover job loss, anything wrong with the house or cars, and so on. I don't separate my different emergency funds just yet.
Anyways, I often ask myself when I should apply more money to paying off debt or to use more to fund my emergency fund. And then I also wonder if I should just take some of my savings to pay off my debt. Here's a great article on this. Here are some tips in order to help you figure out what you should do:
- First off, do you even have an emergency fund? If your savings are earning you less than the cost of your debt/loans, then of course you will be saving money by paying your loans first (instead of saving). But if you don't have an emergency fund set up at all, then paying off your loans completely first might not be a great choice.
- I would try to make an emergency fund of around 3 months pay. That's what I'm trying to do right now. In the article it says just to have an emergency fund of $1,000 at first, but I do not think that's enough.
- After I have my emergency fund set up, then I would start aggressively paying of any debt like it says in the article.
I'm still paying my debt right now, I'm just also trying to finish my emergency fund also.
How much do you have in your emergency fund? What's your plan of savings versus paying off debt?
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I struggle with this constantly! it is tough to know the right thing to do for sure!
When we first started paying off debt we saved up a thousand dollars first then we tackled debt like crazy. We never had an emergency, but I have a feeling if we hadn't something would have popped up.
I don't have emergency fund 🙁 Whenever we save some money, we spend it on something that we desperately need somehow.. Terrible, I know.. But, one thing that it's good is that we don't have lots of debt.
We originally had close to $2500 in our emergency fund (I didn't feel comfortable with $1000 either) because we are going to be on the debt payoff road for a while. Dave Ramsey's group says that traditionally, for most people's debt load, it should take less than 3 years for them to payoff off all debt (other than mortgage) and that $1000 should cover most emergencies during that time. The key would be to replenish the $1000 if you use it. But, this isn't dogmatic – some people feel comfortable with more savings. It also has a lot to do with job security and how stable things are in your life. If you know you are about to loose your job in 3 months, then of course start saving!We have dropped to just below $1000 because we've had to use some, so I need to build it back up. One thing to consider – make your money work for you. Do you have $6000 in savings earning you 2% interest, but $5000 in debt that charges you 6% interest? Your money could be better spent paying off the high interest debt than sitting in the bank. But, it's not always a black and white decision. Either way, savings is never a bad thing!
I have a small emergency fund ($2150, which is a little more than a month of expenses) but I have multiple streams of income and my DH has an extremely highly secure job. Also, I have money set aside for repairs that could be used as well.
Thanks everyone! I'm starting to think that my fund right now is most likely fine. So I guess the plan will be to pay off debt more and then build up the fund. Both of our jobs are extremely secure, so I'm not really too worried about any job losses.
I just made a decision this month with this very same dilemma. I ended up taking $2500.00 from savings to pay off one car loan. It's made my emergency fund a little on the low side, but I hope to build it back up quickly. I never want it to drop below $5000, but I hope I can triple that amount in the next year.
Yup, this is something I struggle with all the time! Like you, my goal for my total emergency fund is $15,000, ideally about $10,000-12,000 in an online savings account for true emergencies and the remainder in the "curveball" account in a savings account with the bank where we do our checking. At the moment the grand total is about $12,500 so we're very close to hitting our goal, and once we do that I'm hoping to more aggressively pay down our student loans.
I agree with you that $1K is too low, but I'm also (finally) in a position where having a fatter e-fund is actually an option. When I was paying off my credit card debt, I had about $2K in a savings account, which was all the savings I had in addition to retirement accounts.Now that I've been credit card debt-free for years and I've purchased my own home which I am 100% financially responsible for, I've set my target e-Fund at $20K. I'll meet this goal this month. Once that's done, I'll have to re-adjust so I'm sending more to my student loans, but I know it's going to be hard to not save more because that's what I really want to be doing (don't we all??)!!
I've wrestled with the same question. We built our emergency fund to a comfortable amount while paying off debt using the 50/50 rule – half of our extras would go to debt, and half to savings. But there have been a few times I've wanted to dump the whole emergency fund into debt to be done with it. In the end, the comfort of having that money in the bank has won out.