I've seen reference a few times recently to maintaining (or adding to) an e-fund while still paying off debt. I don't understand this, honestly.I guess I should qualify, I'm talking about credit card balances with non-minimal interest rates. Doesn't the available balance on a credit card serve the same function as available cash in a bank account, for emergency purposes? I just couldn't sit by (literally, it would bother me on a daily basis) and pay interest when I had the means to pay some or all of it.I would allow a decent cash cushion in a checking account, just to prevent getting near a zero balance, but I would drain any savings account to zero until credit cards were paid off.v/rTom
Just realized I left out a huge consideration--loss of a job. I could certainly see a cash cushion being useful for bills that you can't pay with a credit card.My profession makes me forget that sometimes.v/rTom
Credit limits aren't guaranteed. When credit card companies see a change in usage pattern, they can reduce credit limits, Also, they can reduce credit limits because they decide that they want to reduce risks in specific accounts. I don't know if it is still true, at one time some companies were monitoring for a change in shopping habits from higher cost stores to WalMart. Given account history, it is fairly easy to identify pattern changes that are associated with job loss. With the housing crash, HELOCs limits were being reduced because of perceived risk, and not current value of the property.
Doesn't the available balance on a credit card serve the same function as available cash in a bank account, for emergency purposes? Not really. The credit card company can lower it, change it, etc at their discretion. It is not guaranteed to be there if or when you need it.
I think most people realize there needs to be a balance, a smaller efund & slush fund until the cards are paid off and then taking those payments and making a big efund & slush fund.Part of it is retraining the mindset. Too many people show up on debt boards and whine "well I was paying off, and then I needed tires, and that was an emergency!". No, that was a anticipated expense that should have been paid out of your slush fund. Getting people to think farther than the end of the month and build a realistic budget that includes savings is important to make sure that debt payoff remains permanent and not an never-ending cycle of paydown/ramp back up/paydown.I have an office mate who will always be in that cycle. Why? Partly because his mindset when he thinks about debt paydown is "now that I paid off that credit card, what can I buy???" not "now I can get a comfortable cushion of savings". Lara Amber
For some people, having a small e-fund while paying off debt gives them some peace of mind, plus can get them used to using cash for emergencies instead of adding to their cc debt. Some might find it de-motivating if they're attempting to pay off cc debt to see their balance go down - but then go back up if they have an emergency and have no e-fund so therefore must use their cc.
As LaraAmber and Metrochick pointed out, having something in savings helps people learn new money habits and can keep some expenses from landing on the credit card. I think most people would agree that accumulating a huge amount of savings while you're deeply in debt is counterproductive. But a smallish accumulation of a thousand dollars or so can be a reasonable goal. It can pay for small necessities (like new tires) so that you aren't continuing to add to your debt. Learning how to control debt is a major factor in staying out of debt after the credit cards are paid off.Nancy
I think most people would agree that accumulating a huge amount of savings while you're deeply in debt is counterproductive. Hugh is relative. A fund to cover expected irregular expenses is needed. The next level is to have a low level emergency fund for really unexpected expenses. The next higher level depends on your preceived job security. If you know that in 3 months, it is likely that you could be laid off then paying the minimums and keeping as much as possible in cash would be reasonable. A good compromise between paying off debt and planning is needed, and it is different for everyone.
Another consideration for Efund vs debt pay off is worst case survival.Suppose you have substantial unsecured credit card debt and a job that is likely to disappear and poor prospects for getting another.It might be a smart move to pay the minimums on the credit cards and to put all available cash into the e-fund.If you lose your job and can't get another, defaulting on the credit cards and bankruptcy might be a necessary option. Paying down balances on credit cards if you face that kind of situation obviously makes no sense.What you do depends on where you are. You need to carefully analyze your situation to decide what is reasonable and prudent to do.Seattle Pioneer
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