No. of Recommendations: 4

You wrote, A friend of mine who has been unemployed and living on an e-fund has gotten an unexpected reimbursement of $6,600 which she is very relieved to have. The question is whether she should use this to set aside for her to live on, or pay down her debt. She owes about $3,000 on American Express and $1,000 on Visa. Till now, she has been paying near minimum on each. She still has at least six months of e-fund, but she is fearful of the tough job market; it has been really difficult in NY. The extra $6,600 will give her a few good months of income to subsist on, barring a real emergency or problem.

Opinions and thoughts about how she should best make use of this income?

It depends on whether or not she can borrow the money back from Amex and Visa on equal or better terms in the future. If she definately can, then pay off Amex and Visa and put the other $2,600 in the e-fund. If not, she should pocket the entire amount and stick with the minimums.

Since she's unemployed, cash-flow considerations are paramount. But if she can substitute future credit card purchases -- at a reasonably good rate -- she may be better off saving the money on interest payments. To the extent she cannot substitute credit card debt -- for instance, rent or mortgage payments or if Amex/Visa have closed her accounts -- she should keep enough cash on-hand to satisfy those debts in the future.

However, the real trick is in knowing the unknowable -- how long she'll be out of work. If she'll be out of work forever, hanging onto the cash is definately the way to go. Anything less than that, she'll need to make an educated guess about how much cash she'll need to satisfy her on-going expenses. Fortunately or unfortunately, she's the best one to make that guess.

- Joel
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