by Tricia
I have been reading over and over about the benefits of saving up an emergency fund. And, a well-known author I’ve just recently looked into suggests saving up $1,000 even before you start agressively paying down debt.
I had $1,000 extra that I used to pay down credit card #2. Now I read that I should have kept it for an emergency fund?
I do not have an emergency fund and have never had one. I am living paycheck to paycheck (although there is a little more leeway now) and any emergencies that have arisen have been financed by my credit cards. When our fridge needed to be replaced, it went on the credit card. When we needed a new door, it went on the credit card. Sure, the debt was increasing, but there was no leeway back then to even think of having an emergency fund.
I just think it is more logical (for me) to forgo the emergency fund and pay down the credit cards. An emergency is just that – an emergency. You never know when, or if, it can happen. Why should I let $1,000 sit on my credit card at 16.9% interest when I have $1,000 sitting around doing nothing except waiting for an emergency?
One day, I will have an emergency fund, but I just cannot justify in my mind why I should have one at this point in my life. My financial situation just doesn’t warrant it, and I think what it boils down to is that we all have to do what is right for our financial situation. Just because everyone is doing it or there is a high-profile person promoting it – doesn’t mean that it is right for you.
I agree with you. While it is important to be prepared for emergencies, the thousand dollars cash most likely isn’t going to expand as quickly as the thousand dollars of debt. It would be really hard to find an investment with a 16.9% return that you would be able to get out of. I don’t quite see the logic behind keeping the cash, when essentially your credit card could be the emergency fund. Then you don’t pay interest UNTIL it happens.
I have had the same questions/debates in my mind about “if I have $1000 sitting around at 3% interest, why don’t I put it against a credit card charging 16.9% interest”. I think the difference comes down to mathematics versus behavior.
Mathematically speaking, putting the $1000 toward the credit card is probably better in the long run. And using your credit card to fund those emergencies (like when there is too much month at the end of the money) works…but it does grow your debt.
I think the issue is really behavioral, and I am now a huge believer in having the $1000 emergency fund before paying off the debt. I think the biggest thing to break our credit card addiction is to just stop using them. Even for “emergencies” (unless they are real dire emergencies). We dipped into our $1000 fund this month because we ran short. It just feels different, but you KNOW you aren’t jacking up your card more. You feel like “hey, sucks we ran out of money, but we have money to cover it and don’t need to go into debt”. Then, when you have the money, you rebuild your account. It simply breaks the cycle of going to the credit cards to deal with this kind of stuff. I now *despise* putting stuff on credit cards. It’s all about breaking the cycle that got us into debt in the first place.
It’s not about the figures outing up. Of course paying off 16.9% debt is better than earning 4% interest. What it is about is breaking the cycle of relying on your credit cards to pay for things. Like you said, everyone has to decide on what is best for their situation, but the proponents of saving a baby emergency fund suggest it so that you stop using the cards. The theory is that you will never get out of debt if you keep relying on your credit cards.
I take it you recently stumbled upon Mr. Ramsey… 🙂
Of course you’re right – logically, that $1000 would be of more value going towards reducing your debts than waiting in an account for an emergency to happen. But then, if you were acting logically, you wouldn’t have $37k+ in credit card debts in the first place either. Using the credit cards as an emergency fund has worked wonders so far, hasn’t it? Been there, done that, didn’t even get the lousy t-shirt, so no judgment here, but you might want to give his ideas a chance. We had to dip into our little emergency fund last month for a car repair, and you’d really be amazed at the peace of mind that being able to write a check rather than sign another credit slip gives you.
That said, I don’t personally go for his ‘forget the interest rates – pay your lowest balances first’ approach. But I’m only dealing with 2 credit cards, whose debt I really consider a single value. I get more of a kick out of watching the total balance decline than in seeing the number of my debts shrink, so of course throw the majority of my money at the higher interest card.
So I guess I’m saying, of course you can pick and choose what you want from these ‘gurus’. I found the mini emergency fund extremely useful, if not to my bottom line, then at least to my peace of mind. If it delays my debt repayment a couple months in the end, well, it still was most definitely worth it to me.
I also agree with having the $1000 emergency fund and agree with Lisa where part of the debt repayment process is not to rely on debt for anything if possible. That way you re-train your financial thinking away from debt towards self-reliance. Also, you will probably feel a little more hurt/pain from having to use your emergency fund rather than the credit cards, which will make you think twice about whether it is a “real emergency.”
I’m desperately trying to save up an emergency fund, despite a really serious debt situation. We’re well educated professionals who have suffered two really bad family illnesses that put my freelance career down the hopper as I spent time caregiving, and my spouse is on a disability leave. We literally live from hand to mouth and although we haven’t yet gone to a food bank, we’ve been very close. My cash flow is terribly irregular as a freelancer. Every time an emergency happens — and at this point, anything unexpected is an emergency — it puts us further back.
We can never ever recover if we can’t even out some of these fluctuations, hence the need for an emergency fund. A month after starting it, it’s only $100, but I refuse to touch it. I think it depends on how close you are to the line. We’re teetering on that line all the time and I hope an emergency fund will bring us over the line to where we can at least know we can buy food and pay the rent every month.
Thank you everyone for commenting. I wanted to wait a few days to let everything sink in.
I have a few things to say about your comments – but it’s going to be a bit long. I will be writing a post replying to all of your sometime before the end of the weekend.
If you haven’t commented yet – please do. And thanks again to everyone who has. You have given me a great deal to think about – and I thank you 🙂
Tricia
I am a big believer in having an emergency fund. While we were paying off our credit card debt, we had a small emergency fund of about a few thousand. It actually saved us a few times so we didn’t need to pull out the credit cards. It is a behavioral issue for us. Now that all credit cards are paid off, we are working towards our larger emergency fund as well as paying off the car.
Theresa 🙂
I think you have the right mindset. An emergency fund is not for everyone. John Burley makes the same point you do, which is put your money where it makes the best return. An emergency fund works if you don’t have the discipline for impulse spending or for paying off the debt you currently have. It ultimately depends on who you are and how disciplined you can be with your finances.