Hey everyone! Happy Friday. Today, I have another one of my “short” question posts about whether you should have an emergency fund or pay off debt, mainly because I am extremely nosey. I’m assuming all of you are nosey too.
One of the reasons why it’s taking us a little bit longer to pay off my $38,000 in student loans is because I refuse to touch our emergency fund. I am an extreme worrier and am always afraid that something may happen. We have about 5 months of expenses in our emergency fund (could last a lot longer if we cut things out of our budget), and I want to keep it that way.
Luckily, my student loans will be gone this month, so I don’t really have to worry about this question anymore, but I know that others have questioned what they should do.
Now, why don’t I want to touch our EF? Well, our EF covers many, many things. While I don’t think that a job loss would kill us, a combination of many things happening would. My job is stable, but what if all of my freelancing went down the tank, there was a job loss, something bad happened to the house AND something happened to the dogs?
Well, this is where our emergency fund comes into place. Some of you might be thinking “oh, all of that wouldn’t happen in one month.” But, what if it does? Our EF gives us peace of mind! When one thing goes wrong, it always seems like everything else that could possibly go wrong, goes wrong also.
Some recommend that while you are paying off debt, that you keep just the bare minimum, such as $1,000 in your emergency fund. Others suggest that you build up your emergency fund FIRST and then pay off your debt.
Cat Alford (@BudgetBlonde) says
Great question, one I asked myself a lot when I paid off my credit cards. It’s good to have at least $500-$1k in the emergency fund first before paying off debt, just in case something crazy happens like the things you mentioned above! Then, you don’t have to keep up the cycle of debt, etc.
I’m the type of person who would go crazy over $1k. I would be so worried, but that’s just my personality.
John S @ Frugal Rules says
I think it’s a personal decision, but if I were in debt (mainly credit card debt) I would likely keep it to $500 – $1,000 and work to pay off the debt. Our EF is for emergencies and that only. We have 4 months to cover expenses and 6 months of mortgage payments. We’re on our way to building that to 6 & 12 respectively. I know that’s a big chunk of change, but being self-employed it helps us sleep at night.
Yeah we definitely want to work on building ours up to 1 year before I make the switch.
DC @ Young Adult Money says
I disagree with the $1k emergency fund (the idea I believe comes from Dave Ramsey). There is no magic number, and sometimes things come up (we had over $1k in car bills in the past month alone…all unexpected…>). It’s better to have a higher reserve than to pay down debt, especially when you factor inflation into the equation. Your debt is not as expensive as the interest rate sounds because inflation is needs to be subtracted out. Additionally if inflation increases drastically say 1-3 years down the road and you have a 5-30 year loan (car, mortgage, student debt, whatever it is) your debt will become even “cheaper.”
I agree DC!
Matt Becker says
I’m with you on this one. We have an EF that covers 6 months of regular expenses but more like 9-10 months if we cut things out. We have it in a savings account with Ally Bank, no risk to principal involved at all. I do think it depends on your personal situation, how much of your budget you could really cut out at the extremes, and who you have that’s dependent on you. For me, with a 15 month old son, I feel a greater need to have a big EF than I might if I was single. I think with a lot of these kinds of decisions, the mathematically optimal answer is not always the best answer for the individual, as a big part of creating financial security is creating peace of mind, and that will differ from person to person.
I agree Matt. Thanks!
Andy Hasdal says
I think the best plan of attack is to have $500-1000 in your emergency fund and use whatever else you can to take down your debt as quickly as possible. If I had $5,000 in my emergency fund, well, that’s $4,000 I’m not using to pay off my debt faster which is essentially just a cushion that’s costing me hundreds of dollars in the long run. If a big emergency came up, I would hope most people have a reliable family member or friend who could loan them money or you could tack it on to your credit card as a last resort. I think it’s a matter of how often you’ve had to call upon your emergency fund. If you’re accident prone, well then maybe you should keep a little more on the side.
Thanks Andy. I don’t know if I would recommend keeping a low EF in hopes that a friend or family member can loan you money, but it is something to think about.
laura / no more spending says
I didn’t keep a huge ef when I had debt – now that it’s gone we keep a 12 month (basic costs only) ef for peace of mind. Just today my husband’s job has been put into consultation (it seems to happen every 6-12 months!) – hopefully he’ll be safe, but you never know!
I hope he’s safe!
We have about one year’s living expenses in our emergency fund. It’s probably too much but we have rental properties and I worry about several things going out at once. After all, I have three air conditioners, three furnaces, three roofs!
Anyway, I would rather be safe than sorry but I sometimes wonder if we’re overprepared.
True! You are very right Holly. And I don’t think a person could ever be overprepared.
We are working to have one year in savings. We have about 8 months and are really focusing on growing that. Starting next month we are also going to make larger payments on our cars and then our student loans (last on priority list as they don’t hurt credit/not as high as other payments). We thankfully have no credit card debt. Once we get to one year we are going to move that additional emergency fund to up our 401k from 6 to 10% and then finish paying off loans and continue to grow savings. I think having at least 5-6 months is so important.
Good luck and good job so far! 🙂
I’m in the PF world that thinks a large emergency fund is a waste. I have $5K of cash that is easily accessible. It would be lower, but my old lady needs that much to feel safe. Everything else gets invested and works for me instead of losing out to inflation. If I needed more than $5K at once I could use credit (which I have plenty of) and then sell off investments to cover the bill.
The emergency fund is in two different banks. $1K is in a local credit union and $4k is with Capital One 360 (used to be ING Direct).
As far as paying off the loans it would depend on the interest rate. If you are stuck with the awful 6.8% or so, I would kill those ASAP. If you had the 3.4% or lower I would consider taking a little more time because beating 3.4$ is still very doable. In the end you have to do what makes you comfortable and if that is building and emergency fund first then you are willing to accept the opportunity cost of that decision.
HAha I feel so lonely with my decision!
I too am hesitant to touch my EF, but I’ll be transferring money out of it in about a month to cover my car loan.
WOOHOO! Pay off that loan 🙂
We have about $135 in our “emergency fund.” We’re working on building it up while paying off debt. We’re not really able to put a whole lot into it though as debt seems to take precedence over it. I’m hoping to build up our EF once hubby goes on deployment next year.
Good luck! Hope everything works out 🙂
We have a $200-ish slush fund and no EF. My husband and I discussed this and while we had slight disagreements over it, we eventually decided that no EF was the way to go for us. I’d like to buffer the slush fund a little more but most of our extra income is going to home repair and debt repayment.
It seems like everyone besides me does this! haha I’m so lonely with my decision.
Ree Klein says
I can make it a year without income, but I don’t have any debt. If you have enough in the emergency fund to torch the debt, I’d do it. If a true emergency comes along, I’m sure you could find a solution. Besides, you can replenish you EF really fast with no debt!
True Ree. Thanks!
Debt and the Girl says
I am in the camp for a bigger EF fund. It helps me sleet at night for sure. If you are less risk-tolerant like me, then I think keeping more in savings is a better strategy. You do pay more in interest in the long run but you feel so much better mentally.
Glad I’m not alone!
I completely agree with you. When it rains it pours so I, too, keep a large emergency fund. You really just never know. Our emergency fund has saved us a couple of times already and I’m so happy that I had one.
WOOOHOO I am not alone 🙂
Jessa O says
Right now we have a tiny EF, but we had about 2K and we had to spend it for an emergency. We are working to rebuild it and add to it while paying off debt.
Sounds like a good idea.
I lean more on the side of keeping a smaller Emergency Fund…though $1000 is too small for me. It depends on your circumstances. If it is a true emergency, you can tap into other funds. I don’t like a big portion of my money earning very low interest.
I agree, $1K is too small for me also.
I’m in the small EF while paying down debt camp. If you don’t have at least something saved up you will go right back into debt as soon as something goes wrong. I didn’t have a large EF when paying off debt because the difference between the interest on my debt (10.5%) and the amount I’m getting on my savings (1.5%) makes it an almost no-brainer. As soon as the debt’s paid off, I will be working on increasing this and planned spending savings as a first priority.
I would probably do the same if I were you too. 10.5% is high!
Elizabeth L says
This is weird but I have 2 emergency funds. One is attached to my checking account to serve as overdraft protection, but also because I can transfer that money into my checking account and have it available immediately. So that’s for emergencies that need to be paid ASAP and shouldn’t really go on my credit card. I’m thinking major emergency car repairs, emergency vet visits, major house emergencies, etc. There’s about $2500 in that account.
My other account is in case of a job loss. I can live exactly as I live now for 6 months off of it, or I can stretch it out and make it last about 9 months. That money is also available for more expensive, but similar emergencies as the account mentioned above.
Sounds like you have a good plan 🙂
If I was paying a double-digit interest rate on a credit card, I would consider that an emergency of epic proportion and I wouldn’t have even a dollar saved in my bank account until that was paid off. Why have $1 in a bank account earning under 1% while paying 18%? Worst case scenario is another emergency comes along and I have to use the credit card again. Best case scenario is no other emergency comes along and I pay off that card, then start saving the principal payments + 18% interest.
If I was paying down a student loan at 6.8%+, I would pay it off quickly, but maybe have 1-2 months’ EF to protect myself from having to use higher-interest credit credits. The EF would only be for very basic necessities and not cover any extras like buying clothes, eating out, etc. Knowing that the money is costing me 6.x%+ would make me very uncomfortable and would make for more sleepless nights than knowing I don’t have a big emergency fund.
True. 18% would be killer!
Pretired Nick says
The main thing to me is to forget about looking at your emergency fund in terms of dollars. Instead look at it in terms of time. When people throw out figures like $1,000 or $2,000 they’re completely ignoring the key factor of how long that might last them. If you have low expenses, you need less, if you’re saddled by debt, you need more. In your case when your loans are gone, you’ll need less so right there at the end, you could use some of the fund to speed things along. Personally we don’t have much of an emergency fund and we use our home equity loan as a proxy for that.
I agree definitely! 🙂
I’m going to be a weird one and say that I use a small limit credit card as my “EF” fund at the moment. Too much of my money is going to debt, and even carving out $10/month for an EF is difficult right now. I know, I know, it’s not a true EF, but it would cover me for a few things if need be.
I’m working on paying down this credit card to $0 (from $500), then directing the payment to start my true EF. I won’t get there right away, but I’m working on it!
Just keep swimming. Just keep swimming.
Sounds like a good plan. Different things work for different people 🙂
I am like you Michelle – I keep a large emergency fund because I worry, a LOT. I’ve seen too many things happen to my parents all at once leaving them with nothing, needing my grandma to help out a few times. I don’t want to end up like that. At the same time, I kind of feel like I should be putting more toward student loans, so I have been torn for a while. I think I am going to start making small steps by paying off more, possibly taking some money out of the EF. I probably have too much in there anyway…
Glad I’m not the only worrier 🙂
Sean @ One Smart Dollar says
I think it’s important to have around $2k of an emergency fund and then start paying off debt. Once that is gone you can build it up more.
Very true Sean!
Nick @ ayoungpro.com says
I’m a fan of Dave Ramsey’s $1,000 emergency fund while paying off debt. That is what we did and it worked for us. The funny thing is now I have more than that in savings but I’m freaking out and feeling like i’m living on the edge because we just drained most of our savings for our new house. 🙂
Most emergencies don’t seem to take more $1,000, but I can understand why that makes some people nervous!
I have a friend who had something go wrong with her house’s heating and cooling, and it cost $6,000 to repair! Also, I know of someone who needed a new roof, and insurance wouldn’t cover it. It cost $65,000 (yes, $65,000! – because of asbestos, I believe. And also because of a very steep slant of the roof) and that was after many, many bids for it.
Jenny @ Frugal Guru Guide says
If I had a reliable job, I wouldn’t keep 5 months of expenses in my EF. More like three at my “crunch” level of spending. 🙂
I agree. However, I plan on switching to self-employment, so I am working on bulking ours up even further!
It really depends on your personal situation. When I was fairly early in my debt repayment process, building an emergency fund was VERY important. I was maxed out, so if I ran into any issues I quite honestly would have to start asking people for help. Not good. As I eventually paid off my credit card and started paying down my line of credit, I felt it was more important to pay down debt than to save. If I had $1000, I would put it on my line of credit instead of into savings. If I ran into an issue, the money would come back off the line of credit to pay for it, but then I didn’t have to pay the interest costs on that money while it was on my line of credit. This doesn’t work if your debt is a car loan, a student loan, or anything else along those lines, but in my situation it did work. You have to weigh the variables in your own personal situation, and make your decisions from that point. I’m in the process of building my savings back up (currently at little over $1000). I’d like to get to the point where I have a couple thousand readily available in cash, and the rest ($10,000+) invested.
I think your plan sounds good!
Sounds like a good plan for you guys 🙂
I think the max you can get in my state for unemployment is $1,200.
I agree Tanner.
I think $10K is the perfect amount.
I agree Anna. Thanks!
Joe @ Stacking Benjamins says
I’m with you, Michelle. If you’re self employed, who knows what’s around the corner? Keep that baby beefed up.
My reserve is 3 months but only because Cheryl has a job that isn’t entrepreneurial and that can cover our basics. If she lost that job, she’d be quickly hired someplace else in her field.
Yup, self employment to me means large EF! 🙂
I’m like you Michelle. I am a worrier, and I like a bigger e fund.
Glad you are with me! 🙂
Savvy Financial Latina says
I prefer to have a big EF fund. At least 6 months of expenses. We have 6 mos of expenses in our EF fund. I am worrier, and it lets me sleep at night.
Same here. thanks!
David @my2centopinion says
We have 3 months that I have set aside as an ER fund. This is the level I’m comfortable with. I keep one month is a savings account, the next month is in CD with very light penalities, and the last month I have invested. I also have about another 2 months that sits in a normal investment account. I don’t think of it as a ER, but in a pinch I could take it out without worrying about any type of penalty other then tax on the gain.
Sounds like a great set-up that you have.
I don’t think having an enormous emergency fund is worth while. By all means a few months of historically averaged spending but much more than that and you are tying up capital which is far better used to pay down debt. It’s the difference between doing something which you know will help you and not doing something because a serise of other things may happen but will probably not.
If the brown stuff does hit the fan then you need to be confident enough that you can find a way out of it but think of it this way – what’s the worst that can happen if you run out of your emergency fund. If you used credit facility for a few months, with all that PF people know, would you be afraid of debt? Don’t be. Debt is not necessarily bad. You went into debt to go to college – $38k’s worth. Was it worth it? And if you are so worried about the coincidence of 5 or 6 bad things happening in the same month then perhaps you should take a deep breath. Life is about balance. You can never completely anticipate the unexpected.
Haha thanks John. I’ve just always been a worrier 🙂
Lisa E. @ Lisa Vs. The Loans says
Currently I have $1,000 in my EF. Eventually, I want to have around 6 months of expenses in there! I think $1,000 is good enough for now. I think the bigger emergency is having debt that’s growing at a greater rate than my EF!
Sounds like a good plan 🙂
Newlyweds ona Budget says
IF you’re paying off debt with interest rates of 4.5% and you’re only making .5% interest in your savings account, then it makes sense to pay off the debt as quickly as possible. I also wouldn’t feel comfortable with just $1000 in a savings account for an emergency fund, but if the world collapses like in your scenario, then we could ALWAYS rely on our credit cards. yes it would suck to go back into debt but its better than paying interest every month “just in case”
You are very right. Sometimes I wish I wasn’t such a worrier!
Mrs. Pop @ Planting Our Pennies says
We like to keep about 4 months worth of expenses + all of our deductibles (house + cars + rental property). The poop would really have to hit the fan to need all that, but keeping it in high interest savings is nice peace of mind that we’re willing to pay for.
I don’t think there’s a set amount any one person should save for financial security. I set aside $200 per paycheck to go towards savings and then I go relatively crazy on debt payment with any extra money. That savings is an emergency fund of sorts but it certainly helps relieve some worry while throwing as much as possible towards debt. Watching those $200 add up and gain interest is certainly rewarding but not as much as getting rid of high interest rate loans! Finding that balance has been huge for me.
I need the security of the EF. Keep that secure and then go to town on your bills! I am using a really wonderful book to help me with my finances. The book is called, “Practical Steps to Financial Freedom and Independence: Your Road Map to Exiting the Rat Race and Living Your Dreams” by author Usiere Uko. This book does not just tell you how, but moves you towards action! I can see a big difference in how I view my own finances. http://www.financialfreedominspiration.com/
Scott @ Youthfulinvestor.com says
I go both. As a result of interest rates, it might make more sense to pay off some of the debt first, which means I will focus on that debt first and foremost. However, having an emergency fund, even with some debt, will come in incredibly handy. There have been many instances when I’ve had to use that money to pay for an unplanned expense, that for example, only allowed for cold hard cash, which was ready to go in my savings account.
Laurie @thefrugalfarmer says
I’m all for the emergency fund. The peace of mind it provides is well worth it!
Margaret Polino Nicholas says
I totally relate with what you are saying. I am freaked out without a EF! Tanks for sharing.
I have a little over $1k currently in my EF, I can only contribute a small amount each month to it because I am throwing larger chunks of money into a savings account for when I go on unpaid maternity leave next month and for when I start school back up this fall (trying not to take out any more student loans). And when I return to work I will be working less.
I think that past experience also influences whether or not a person is comfortable with a small EF or not. In an ideal world my EF would be larger, probably covering 6 months of expenses at least. In the past, I have survived a loss of 50% of my income, it was not easy especially since I had just used a large chunk of my EF to move out of a dangerous living situation.
Emergency Fund over debt payoff any day. Last year my husband lost his job of 13 years with no warning, no inkling anything was going to happen, nada, nothing. We had $30,000 in our EF, and it lasted 6 months. Within the first month of losing his job, we had major plumbing issues that had to be fixed, and then a car repair. We are debt free except for mortgage and student loans – and believe me, if you suffer something catastrophic that is going to require money, having money in an EF will keep you eating and keep the lights on – being debt free won’t.
Having $500-$1000 stuck back is not an EF, that is cash on hand or money in the mattress. A real emergency fund is 6 months worth of living expenses, minimum, preferably more, that you know you have in cash or in something that can be liquidated immediately when you need the cash.
I agree with you on this. Most readers have only $1000 or slightly more EF, I think that is not enough. Everyone should try to have about one year EF depend on your monthly expenses.
Laura S. says
I like to do both as a few others stated. I automatically add $35 a week to the EF. It isn’t a lot, but keeps it from staying stagnant. I put every other bit of extra cash toward debts.
My son told me to put $20 dollar a day inside a container since Jan 1 this year. Until now I have saved about$3300. What a great idea.
Jules@Fat Guy,Skinny Wallet says
I am still trying to figure this out, but I do both.
Well you already know I’m in the pay off debt and no emergency fund group but I’m kinda a badass rebel like that 😉 you gotta do what works for you and your student loan is paid off soon which is awesome!
ah… what emergency fund? i’m racking up the student loans as we speak! i should be about 45-50k in the hole after school, but more after grad school. my BF and i more than okay with living in an apartment to pay off our loans. i havent gotten this far yet in my planning, but we’re been talking about it and getting comfortable with the inevitable makes it easier to deal with when it finally happens, i think.
I have a few thousand in my savings fund. I have a huge amount of credit card debt, so every time I pay some of that off, I have that amount of my limit back, haha. Which I know is not the same thing, but it makes sense for me. I lost my job a year and a half ago, but I didn’t even touch my savings before I found a new one. And I lived with other people for free until then. I surprised myself with how good at mooching and stretching a dollar and using my connections to find a new job/gig/whatever I am.
Gen Y says
I current have a ton of student debt, and I just don’t think EF is my priority right now. So I consider the 1.5K I keep in my chequing account to waive bank fees my EF.
Considering there are no new big algorithm updates coming up for a few months, your blog’s income is clear. And since you’ve survived so many in the past, there is no reason to think anything would have a significant impact on your current earnings. And like you said, your job is stable. I would use 100% of the cash earning from your blog to just pay off any debt you have, excluding your mortgage. Considering you are in a high tax bracket, you need every deduction you can get.
KC @ genxfinance says
I’d probably save for an emergency fund just to have a little peace of mind. I doesn’t have to be much so that I can still continue paying my debt. but I also agree that it may be a personal choice. Others would feel better if they can ay their debt first.
Simon Halls says
I do believe that paying off debt is always the best way to utilise spare funds or emergency funds. Within reason of course… do set something aside for emergencies.
Firstly, paying off debt is a great mindset to get into and secondly, you’ll be extremely glad that debts are at a minimum when in retirement.
As someone of the “be prepared” mindset, my advice is save for an emergency fund first, then pay off debt…although when we had huge amount of debt ($50K) we didn’t have much of an emergency fund because all our money went to keeping our head above water. So I totally get how it might be difficult to save an emergency fund when you are in debt.
Now that we are debt free, we keep an emergency fund of 1-year of living expenses. More than the recommended amount but we’ve been noticing that it can take people longer to find a job and the last thing we want is to go back to being in huge debt. No way!
David Smith @ PBC says
What does the emergency fund really cover? Hospitalization perhaps or some form of expenses which is really very important. Well, the amount that should be in our fund actually depends on us. the important things is to have money earmarked for such contingencies.
Ashley @ Saving Money in your Twenties says
I work for the federal government and my job is fairly stable (knock on wood) so I’m not too worried about losing my job. So I only keep a couple months of living expenses- the bare bones minimum living expenses- in my emergency fund. I want to build it up a bit more for those “just in case” moments, though 🙂
Whatever makes you feel comfortable is the right answer. My boyfriend just paid off the rest of his student loan and almost wiped out all his accounts in the process. Instead of being super excited about being done with loan repayments, now he’s a little nervous about his low cash balance! Not exactly the feelings you want to have after making that last payment… 😉
Gosh, guys/gals. After reading this blog and the responses to it, I, frankly, am just shaking my head. Lose the over inflated EF and pay those damn bills off – now! Have a little faith. You’re young – if shit happens you’ll figure out a way to survive and once you’ve got those damn bills paid off, you’ll have more than enough for an EF. Seriously, has my generation scared you so badly that you’ve got no faith in yourselves, this country, whatever? Wow! If you had ANY idea of how “no EF” prior generations lived with, you’d probably seriously stroke out. Suck it up – trust a little. Lose the damn debt – now! And you’ll be fine.
I am just getting started on budgeting and getting our family finances in better shape, thanks to a great book by Usiere Uko titled, “Practical Steps to Financial Freedom and Independence: Your Road Map to Exiting the Rat Race and Living Your Dreams-” it has changed our lives. I have really valued the comments made here and will ponder them to figure out what is best for my family… it is a tough decision. Thank you for putting your blog out here for people to be able to discuss and learn more about different financial situations.
I focused on paying off my credit card debt first, which I just finished at the end of may. Woot! I’m now building uo my emergency fund to at least 3 months worth of expenses. Once that’s reached I’m probably gonna focus everything at my other debts and use a snowball method.
We currently have $1200 in our EF. I recently started having 10% of my checks go into the EF, and we just broke $1000! I was very excited about that, but now I’m wondering… should anything in excess of $1000 go to credit card debt? I’m pretty embarrassed to say we currently have about $4k in credit card debt… never thought that would happen to me. Some of it is due to us paying for my husbands grad school, and we are waiting on student loans to pay for that portion (which of course is just more debt).
I think what we’ve decided is to really start budgeting more and working harder to pay off the credit cards- we can afford to pay more than we have been, and probably decide to keep the EF at $1200 and use anything above for debt just for now. Hopefully we can knock it out in about 6 months. For some reason $1200 makes me feel a lot safer than $1000 🙂 After we are debt free we will want to increase it to about $6000, but that might be awhile since I’m about to go back to school as well. It’s quite stressful to me, but my husband is always reminding me that when we are both out of school we will be making a LOT more money and should be able to pay the loans off quickly (I know for a fact people like Dave Ramsey would not approve of that mentality, but we think it’s a pretty safe risk considering our careers).
We have been prioritizing debt repayment, but we still contribute semi-monthly to our emergency fund for unexpected surprises. We are trying to eliminate some of our monthly expenses so we can put more towards our savings.