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Author: jomejamo Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 308451  
Subject: emergency fund while in debt? Date: 2/26/2001 4:19 PM
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I have way too much debt and am trying to pay it down as fast as possible. In principle, I know that it's a 'better investment' to pay down high interest debt than to put it anywhere else, so I've been putting all extra money toward paying off my highest interest credit card. Yesterday though, I read in a newspaper column (Jane Bryant Quinn) that I should still be saving back 6 weeks salary as an emergency fund (3 months if I didn't have high interest credit card debt). Is this on target do you think?

Jomejamo
jome@dnaco.net
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Author: impolite Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 59553 of 308451
Subject: Re: emergency fund while in debt? Date: 2/26/2001 4:28 PM
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Can you take $50 a month or so of what you are paying the CC and put it away in a savings account? It'll give you a little cushion for emergencies, that way even the smallish emergencies won't end up on the CC.

If you really think you need one bigger than that, then take $100 a month until you feel comfy. It's all a matter of preference. Some here don't have any emergency fund, and through every dime they can find towards the debt, figuring that if something bad does happen, they can put it on their nearly cleared CCs.

Others only paid minimum until they had an emergency fund built, then started snowballing their CC payments.

DH and I are taking the middle road now that all the CCs are paid off, and we have car payments left only. We pay extra toward them every month, but only about $75, and put the rest into the emergency fund/car insurance premium fund/we really need a vacation fund.

So, just determine your comfort level, and go from there.

impolite

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Author: LuluB Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 59555 of 308451
Subject: Re: emergency fund while in debt? Date: 2/26/2001 4:33 PM
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Yes. You will be glad you did. Get $1000 set aside to start EF. Once you accrue that much, add less to it and put more onto the CC debt.


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Author: LuluB Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 59556 of 308451
Subject: Re: emergency fund while in debt? Date: 2/26/2001 4:35 PM
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Get $1000 set aside to start EF

I should note that Kiplinger's recommends paying only the minimums to your CC's until you get $1000 to $1500 set aside in an emergency fund. Any extra money that you would have sent to CC's? Send to your EF.

Louise

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Author: nmangohig Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 59560 of 308451
Subject: Re: emergency fund while in debt? Date: 2/26/2001 4:46 PM
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I guess it depends what article your read.

Can someone explain why you wouldn't pay down your cc first? If something bad enough were to happen that would qualify as an "emergency", you could always charge back to/withdraw from the cc that you are paying down. That is, assuming your cards are in good standing.

NEM



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Author: LuluB Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 59561 of 308451
Subject: Re: emergency fund while in debt? Date: 2/26/2001 4:49 PM
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The whole point of having EF is to NOT charge to your credit cards. If you keep charging on them, you'll never get them paid off.

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Author: ishtarastarte Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 59562 of 308451
Subject: Re: emergency fund while in debt? Date: 2/26/2001 4:58 PM
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I have way too much debt and am trying to pay it down as fast as possible. In principle, I know that it's a 'better investment' to pay down high interest debt than to put it anywhere else, so I've been putting all extra money toward paying off my highest interest credit card. Yesterday though, I read in a newspaper column (Jane Bryant Quinn) that I should still be saving back 6 weeks salary as an emergency fund (3 months if I didn't have high interest credit card debt). Is this on target do you think?

The usually recommendation around here is to build a "mini" emergency fund of about $1000-$1500. This allows you to develop the discipline of saving and to have cash on hand when life craps on you so that you don't have to use your CC in an "emergency" like the brakes going out on your car.

Ishtar



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Author: nmangohig Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 59564 of 308451
Subject: Re: emergency fund while in debt? Date: 2/26/2001 5:05 PM
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The whole point of having EF is to NOT charge to your credit cards. If you keep charging on them, you'll never get them paid off.

----------------------

Not true. Only charge to them in the case of an emergency. In the meanwhile, however long it takes someone to accumulate their EF, they are losing the difference in interest between their savings account and the credit card.


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Author: LuluB Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 59565 of 308451
Subject: Re: emergency fund while in debt? Date: 2/26/2001 5:09 PM
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Are you saying that all the experts are wrong? It's what they do for a living, so I suppose they know something.

I had expensive emergencies last year, one right after the other and trust me when I tell you... if I had not had EF I would have an outrageous CC bill.

Been there, done that. No thanks.




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Author: ZolaX One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 59566 of 308451
Subject: Re: emergency fund while in debt? Date: 2/26/2001 5:11 PM
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I personally am putting aside a small amount ($25) every month. I use an automatic payment, so I con't spend it! Any extra money is going to the debt because it is saving me money in interest fees, and the sooner I stop paying those, the sooner I can have some real savings!

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Author: foolishinTX Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 59568 of 308451
Subject: Re: emergency fund while in debt? Date: 2/26/2001 5:22 PM
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You're going to get responses from various schools of thought. Every situation is different. From a purely mathematically perspective it doesn't make since to put any money in an emergency fund while you are in debt. From a reality perspective, you really should or emergencies will only add to your debt load.

It depends on your own comfort level. Do you really need 3 months? How about 1 month? Enough to cover your home insurance deductible?

In my home, my husband's business slows to almost non-existent in Janauary. Therefore, we MUST have an emerency fund built in JUST FOR THAT. We also in the process of rebuilding (as January has come and gone) to have that fund + the deductible on the home insurance (Tornado season is just around the corner and I'm not sure our roof and fence will make another year of high winds!).



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Author: TMFCheeze Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 59576 of 308451
Subject: Re: emergency fund while in debt? Date: 2/26/2001 5:45 PM
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I'm dealing with some credit card debt of my own, and I'm finding it very helpful to keep money in reserve, even though theoretically I could slam every extra dime into paying off the debt. As long I know that my total debt is declining every month, I'm satisfied, knowing that I'm making steady progress. Having an extra $1000 or so on the side to handle unexpected expenses when they come up is doing a lot to boost my confidence about my ability to continue to reduce my debt, month after month.

Your emergency fund is something like the shock absorbers on your car -- if you didn't have them, then every tiny bump on the road would be jarring. Having that extra cash in reserve makes me feel like I'm more in control, and when there is a surprise, I can handle it a lot more easily.

I used to put every extra dollar I had into paying off the debt -- then some new sudden expense would come along and I'd feel like I'm out of control again. That's not a good feeling when the challenges are already difficult enough.

That's just my take on things. A different approach might work better for you.

Cheeze

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Author: TMF2Aruba Big funky green star, 20000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 59580 of 308451
Subject: Re: emergency fund while in debt? Date: 2/26/2001 5:49 PM
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Heya Cheeze!

I think you make a very valid point, one I bring up from time to time also.

A sense of comfort is a wonderful thing, and even though it may mean that total debt-freedom may have to be pushed back, having some liquid reserves gives some welcome breathing room.

Many will argue that paying off the cards will leave you with the MC or Visa to use in an emergency, but I believe if you can avoid resorting to them, then all the better. Knowing that there's some cash on hand if you get into a tight spot can be very valuable. :)

Tony
...but I still am...

Off2Aruba

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Author: stdupree Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 59585 of 308451
Subject: Re: emergency fund while in debt? Date: 2/26/2001 6:08 PM
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Are you saying that all the experts are wrong? It's what they do for a living, so I suppose they know something.

That supposition would be incorrect. What experts are paid for is dispensing "expertise" that sounds believable. Their advice may or may not be correct. And also since they don't know you or your situation personally, their advice may or may not even pertain to you (assuming it was correct in the first place).

I recommend redefining what you call and "emergency." If it does not involve the bare minimum needed to feed, shelter, or provide health care for you or your family, it is not an emergency. The only exception would be something you need to pay for to get to/continue your job (so you can earn money to feed etc). But try a little preventative maintenance. I swear, from all these reccommendation for emergency funds, people's brakes go out at least 2 or 3 times a year. Take it to a brake shop BEFORE they go out to get a free inspection, most places will do it hoping to get your business if they need to be fixed.

Once you have redefined "emergencies," put them on your credit cards when they do happen. Yes this will slow down your debt repayment, but less than putting the money in a low interest emergency fund would have. If you do this frequently your balances will go up instead of down, which is why you had to go through step 1 (redefining emergencies).
-steve

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Author: stdupree Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 59586 of 308451
Subject: Re: emergency fund while in debt? Date: 2/26/2001 6:10 PM
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p.s. this applies only while you are trying to get out of debt. Once you are out of debt, build your emergency fund up to 3-12 months worth of living expenses (depending on your situation).

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Author: ishtarastarte Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 59587 of 308451
Subject: Re: emergency fund while in debt? Date: 2/26/2001 6:14 PM
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The whole point of having EF is to NOT charge to your credit cards. If you keep charging on them, you'll never get them paid off.


What Lulu said!! Also, it's a discipline issue. If you have been a chronic spender, learning to save is hard. Many people WON'T save their whole debt repayment payments if they haven't already established the discipline of saving.

Ishtar

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Author: tanaquil Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 59609 of 308451
Subject: Re: emergency fund while in debt? Date: 2/26/2001 7:44 PM
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Re: building the emergency fund: it's a matter for personal preference. Personally, I think a month or more of expenses is more than I need while I'm paying down debt, partly because I am in a job which I can't get thrown out of unexpectedly short of total disability (academia). Right now my emergency fund is way down, so I'm putting 5% of gross plus any bonus amounts straight into the emergency fund, and 10% of gross into cc payments (5% of gross pre-tax goes into retirement funds). Find a middle ground that works for you.

Tanaquil

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Author: skb1976 Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 59612 of 308451
Subject: Re: emergency fund while in debt? Date: 2/26/2001 8:07 PM
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...Your emergency fund is something like the shock absorbers on your car...

I *REALLY* like that metaphor... :)

I know...no substance here, but I just wanted to share.

--skb

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Author: Mark0Young Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 59627 of 308451
Subject: Re: emergency fund while in debt? Date: 2/26/2001 10:31 PM
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...Your emergency fund is something like the shock absorbers on your car...

I *REALLY* like that metaphor... :)

I also like it! Other analogies are a "reservoir" (builds up when not needed but can be used when needed), and a "buffer" (smooth out the shocks of economic demands with one's cash flow, but shock absorbers is indeed one example of a "buffer" between the rough road and the car frame). One could say that a small reserve is like Bufferin(tm) for the more upsetting parts of one's banking.





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Author: Mark0Young Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 59629 of 308451
Subject: Re: emergency fund while in debt? Date: 2/26/2001 11:53 PM
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Can someone explain why you wouldn't pay down your cc first? If something bad enough were to happen that would qualify as an "emergency", you could always charge back to/withdraw from the cc that you are paying down. That is, assuming your cards are in good standing.

This is indeed true, as far as it goes.

I am one of those who advocates building up a "mini emergency fund" to about $1,000 to $1,500 while still in high interest debt.

Cold turkey: If abusing the cards was the problem or a contributing factor, often the best way to use the cards is complete abstinence. Since little emergencies tend to come up fairly often (e.g., new tires, break job, taxes, etc.), to stay away from the cards one would need to be able to pay for those smaller emergencies from somewhere else (e.g., the "mini emergency fund").

Of course, when faced with a financial emergency larger than one's "mini emergency fund" one will have to do something else, even if it means making use of the available credit on one's cards, but the intent is to break the reliance on financing on the cards for the more modest and more frequent emergencies.

Momentum: It is encouraging watching one's debt balance go down. However, many people find it discouraging seeing the debt balance go the wrong way. By having the long term debt separate from the short-term emergencies, many people can keep up their momentum (their motivation, determination) even with the occasional step backwards, because they see the long-term debt still going down.

To keep long-term debt going down, one has to use something else for the smaller emergencies, such as either a savings account or a separate card that is normally kept paid off.

Savings habit: By starting even when in debt, forming the savings habit will serve well, both for saving up an emergency fund, and for saving up in full for major purchases south of a house or education.

Self reliance: There is a certain amount of calm one has when, in the face of an unexpected expense, one knows one can pay that expense, and not need the assistance of a third party for the more regular expenses.

Different people have different makeups and temperaments, different financial situations, etc., so a $1,000 to $1,500 "mini emergency fund" is not the best fit for everyone. But I think it is a reasonable approach for many people.

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Author: FoolEugene Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 59630 of 308451
Subject: Re: emergency fund while in debt? Date: 2/27/2001 1:55 AM
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The whole point of having EF is to NOT charge to your credit cards. If you keep charging on them, you'll never get them paid off.

I am afraid this is too simple and is not always right. Very often but not always.

Your answer to the question in this topic is not as universally correct as you are trying to make it. The answer depends not only on your definition of emergency, but also on your definitions of emergency fund and debt, as well as the person's income and its regularity, monthly spending (debt excluded), personality, comfort threshold and a bunch of other factors, like breakdown of debt into types of credit, credit issuers, credit cards and even APRs within an account. Nobody can give sound advice on this topic without looking at all those factors first.

Let me give you a couple of examples.

"Emergency" is defined as an unexpected and sudden event that must be dealt with urgently. If "unexpected" and "sudden" charges arise so often that your debt grows instead of shrinking, redefine emergency (or carry lucky charms with you at all times).

If putting food on the table and going to the movies with your friends who "unexpectedly and suddenly" come to visit for the weekend makes you plunge uncomfortably deeper in high APR debt, then you probably need more of an EF.

Some people do not have a dedicated emergency fund at all (or at least they don't call it that), they just keep their money in an easily available checking/MM account. If you have control over your spending, I don't see a problem with that.

If you are carrying low interest debt (promo APRs, for example), putting together an EF is smarter (but not necessarily absolutely justified) than if your debt is at high APR. In fact, if the APR is lower than the interest you are getting on your EF, I would not even recommend paying any more than your minimums. So, even though, it's counter-intuitive, you save money by holding on to your debt and growing your EF faster than you otherwise would. Of course, it gives you less of an psycological advantage of seeing your debt go away fast, but for some people it can be a lesser issue than for others.

Even if you make a lot of money, you need a bigger EF if your paychecks are very uneven, irregular or infrequent.

So, the bottomline is, it depends. It's wrong to assume that somebody else's situation is similar to yours.

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Author: felipej Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 59659 of 308451
Subject: Re: emergency fund while in debt? Date: 2/27/2001 10:57 AM
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Are you saying that all the experts are wrong? It's what they do for a living, so I suppose they know something.


From a mathematical perspective, the experts *are* wrong. The only way you would win is if your emergency fund earns more interest than you pay out to your cards. This assumes that you are not maxed out on all your cards, in which case you would not be able to charge an 'emergency' on the cards.

Now, from a psychological perspective... that's a different story. Many people will feel better having an emergency fund set aside while at the same time paying off debt.

The bottom line is YMMV.

cheers
Felipe

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Author: fjf33 One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 59666 of 308451
Subject: Re: emergency fund while in debt? Date: 2/27/2001 11:44 AM
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I think you need to do a risk/reward assesment. I don't know what you do for a living, but for instance my brother works for Motorola. Last Friday he was told that he had 2 more paychecks coming. Now he has to scramble for a job. He has a big CC debt that he has being paying down but no reserves. In conclusion he doesn't even have enough for a month of not receiving a paycheck. So that is the kind of emergencies you should look at. Plus there is the usual, things. A car brakes, a tooth chips, an arm brakes, etc. Most of it can be fixed by going into deeper CC debt but do you really want to?

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Author: Dwdonhoff Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 59668 of 308451
Subject: Re: emergency fund while in debt? Date: 2/27/2001 11:58 AM
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Clearly, you still have available credit... so consider the various considerations;
1) Savings will earn some amount of interest (small),
2) the unpaid debt will be charged interest (larger), making the net of the 2 accounts a negative monthly charge,
3) Unused credit incurs no interest charges, so it acts as a savings account at a net zero monthly charge.

SO... as long as your credit is good and available, keep paying all extra funds to eliminate debt principal. The unused credit balances will serve as your savings accounts, and cost you less (zero interest on unused credit) than the net effect of paying interest on credit balances and receiveing savings interest.

If you do not have enough available credit for the emergency timeframe you want to cover (6 weeks, or whatever), then do stuff away the necessary balance into savings... but do so AFTER you've paid all funds to debt principal. In other words, always make sure you pay your cheaper money (the stuff you earn) to buy back expensive money (the stuff you borrowed) first. Definitely save, but only when that's the highest and best use of your funds.

Best luck!


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Author: wileyjon Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 59679 of 308451
Subject: Re: emergency fund while in debt? Date: 2/27/2001 2:02 PM
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Now, from a psychological perspective... that's a different story. Many people will feel better having an emergency fund set aside while at the same time paying off debt.

The bottom line is YMMV.

and what does YMMV mean?

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Author: beckalata One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 59680 of 308451
Subject: Re: emergency fund while in debt? Date: 2/27/2001 2:06 PM
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The bottom line is YMMV.

and what does YMMV mean?


Your Mileage May Vary?

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Author: ishtarastarte Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 59687 of 308451
Subject: Re: emergency fund while in debt? Date: 2/27/2001 2:56 PM
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and what does YMMV mean?

Your Milage May Vary; meaning you may react differently than others in the same circumstances.

Ishtar

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Author: finances0 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 59690 of 308451
Subject: Re: emergency fund while in debt? Date: 2/27/2001 3:16 PM
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I don't have the answer for you, but I sure would like to hear what others think about this issue.

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Author: JosephFrancis Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 59694 of 308451
Subject: Re: emergency fund while in debt? Date: 2/27/2001 3:39 PM
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The question is too general. Cash reserves depend upon the potential for job loss and timely replacement. If it takes one year to locate a position and you have no other resources ie. an employed mate you are in big trouble.

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Author: LuluB Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 59703 of 308451
Subject: Re: emergency fund while in debt? Date: 2/27/2001 4:20 PM
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I recommend redefining what you call and "emergency." If it does not involve the bare minimum needed to feed, shelter, or provide health care for you or your family, it is not an emergency.

Then I will elaborate. Sweage in my basement Twice and a car that needed repair in order to continue running. Those were definite emergencies in my book. Cleanup of my basement was a bitch, and expensive, and my car was not as cheap to repair as I would have liked.

I think reason those experts give the advice they do is because of situations like mine. Plus, if you do a search on this board of how people have stayed in debt, or have not gotten out of it as quickly as they "could" have, I'm sure that whipping out the plastic and adding to an already overwhelming debt load is one of the primary reasons.

In a perfect world, I'd say Yes, Sock away every last penny you can find onto paying off CC's and other high interest debt, but this world is far from perfect.

Hence, the experts' advice.

FWIW

Louise

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Author: LuluB Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 59704 of 308451
Subject: Re: emergency fund while in debt? Date: 2/27/2001 4:22 PM
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So, the bottomline is, it depends. It's wrong to assume that somebody else's situation is similar to yours

I am not assuming that everyone's situation is like mine. I am, however, making an educated guess that there are *more* situations like mine than like what other posters realize.

Heck, even I didn't always have emergencies like I've had lately. I just don't plan to repeat the experience (as if I planned for it to bein with?)...

Louise

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Author: FixitWoman Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 59705 of 308451
Subject: Re: emergency fund while in debt? Date: 2/27/2001 4:34 PM
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and what does YMMV mean?

Your Milage May Vary; meaning you may react differently than others in the same circumstances.

And here I thought it meant:

Your Means May Vary

Kim
LBYM -- Living Below My Mileage
:o)

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Author: Mark0Young Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 59759 of 308451
Subject: Re: emergency fund while in debt? Date: 2/28/2001 12:12 AM
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Now, from a psychological perspective... that's a different story.

As well as the habit issue. The old habit of using the card too readily to finance a purchase, which got a lot of people into credit card debt in the first place, has to be broken or the old habit will again drive up the debt. A "mini emergency fund" provides an alternative to financing minor emergencies, getting away from the habit of financing them on the credit cards. (I am trying to word this to separate the financing of unexpected expenses on the card from using the credit card as a payment method and paying off the card in full each month.)

Also, by separating long-term debt from current expenses (e.g., not charging on those cards but instead using either a "mini emergency fund" or a separate card one pays off in full every month), it becomes clearer whether one is succeeding in living below one's means and paying off existing debt. But when it is comingled, it is too easy to deceive oneself unless one tracks it carefully (e.g., a running budget).


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Author: redcayuga Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 59777 of 308451
Subject: Re: emergency fund while in debt? Date: 2/28/2001 9:55 AM
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Can someone explain why you wouldn't pay down your cc first? If something bad enough were to happen that would qualify as an "emergency", you could always charge back to/withdraw from the cc that you are paying down. That is, assuming your cards are in good standing.

My thoughts exactly. Every dollar paid towards a cc increases the available funds.

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Author: felipej Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 59784 of 308451
Subject: Re: emergency fund while in debt? Date: 2/28/2001 10:33 AM
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Your Mileage May Vary?

Correct.

When in doubt check www.acronymfinder.com

cheers
Felipe

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Author: vakoala Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 59789 of 308451
Subject: Re: emergency fund while in debt? Date: 2/28/2001 10:46 AM
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Can someone explain why you wouldn't pay down your cc first? If something bad enough were to happen that would qualify as an "emergency", you could always charge back to/withdraw from the cc that you are paying down. That is, assuming your cards are in good standing.

First I don't think there is a "Correct" answer to this. If you don't feel comfortable with no money in the bank then build an emergancy fund. If you feel comfortable that you can now just use the credit cards for emergencies then don't save the fund.

That said this is how I do it. In my buget I have set aside money for emerganies and non monthly expenses, clothes, gifts, car repairs, car maintance, car registration, etc. I take this money and put it on the highest interest "major" credit card. That way when the emergencies or the other expenses come up they are "pre-paid" (the way I look at it). For me the feeling of saving in CC interest while I don't need the money is better than having it in the bank. The one exeption to this is my Personal Property tax as the city has not seen fit to allow it to be paid without a charge. So far this has worked really well for me.


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Author: Fireheart10 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 59815 of 308451
Subject: Re: emergency fund while in debt? Date: 2/28/2001 1:29 PM
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Building a small emergency fund (mine started out as $1000) was a big key for me. For me, having that was a little boost of confidence, creating a sense of "I really can do this". I highly recommend it, unless you are so totally in control of your budget that you can foresee and plan far enough ahead to avoid having to charge anything (and how many of us in serious cc debt are in that shape! LOL). I also think it helps alleviate some of the pain of the paydown period - ie those times when you feel totally deprived and desperate, you can "splurge" on a little something without slipping further in debt. I did this maybe once or twice a year during my worst years, maybe $100 a pop, and it was just the medicine I needed to shore up my fortitude to continue.

In summary, it may not make the most sense in pure dollars and cents terminology, but for the psychological boost and "weak moment" support it provides, laying some emergency cash aside is (to me) one of the first things you should do when you decide to pay down your debt.

YMMV, of course. :)

Fireheart10@juno.com
(nearing big-a** Happy Dance, from $34K ccs ...now $5K... soon $0K! I'll keep you all posted.)



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Author: royabettle Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 59823 of 308451
Subject: Re: emergency fund while in debt? Date: 2/28/2001 2:24 PM
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Well, this is an interesting point to ponder and probably will boil down to your personality, preferences, etc.

Roy's Law:

“Without assets, you cannot grow passive income. Period.”

My family's goal is to eclipse our monthly expenses with passive income (I don't have to put forth any additional effort yet the money keeps coming). Dividend stock, rental properties, intellectual property residuals ... whatever works so long as we achieve financial freedom by eclipsing our expenses with passive income.

Having said this, I cannot invest in *anything* if I have no assets (read: cash) with which to invest, ergo if I spend *all* my "discretionary" money reducing debt, I will have nothing to invest with. I'll be better off being debt-free, but I will have missed out on months or years during which I could have been earning interest by putting all my money into eliminating the interest I am/was paying.

Now, debt does carry - typically anyway - a higher interest rate than investments (Kinda tips you off as to who wins the debt game, yah?) so wouldn't it make sense to stop paying interest? Of course it does, but not at the expense of continuing to invest for my future so a balance must be developed.

I realize that I haven't specifically addressed the "emergency fund" part yet; trust me, I'll get there.

For my family, a percentage of my net income (my wife does not work outside the home) is reserved for debt reduction (or was; we're down to less than $500 total debt load now so I know this works). That percentage is first used to "pay the minimum" on all sources of debt with the balance being applied to the debt source with the lowest total dollar figure. Once that source of debt is eliminated, the balance after the "minimums" is applied to the next highest total dollar amount until it is gone ... and so on, and so on.

All along the way, the amount of money left over after "net income after bills" and "debt reduction allowance" is reserved to invest in income-producing assets.

THE FIRST INCOME PRODUCING ASSET IS AN EMERGENCY FUND. In our case, the fund is 3 months of SALARY. Not 3 months of expenses. Why? Because 3 months of expenses will last 2 months of no work, that's why.

Why is an emergency fund an income-producing asset? Because I align "peace of mind" under "income" is why. My spiritual, physical, emotional and mental well-being is necessary to keep me clear-headed. I need a clear head to steer my family toward our goals, ergo while an emergency fund produces an anemic interest rate at best (due to my choosing to keep it liquid), it does contribute in a *major* way to my ability to stay focused.

Just my $0.02 ... at a compound interest rate of 6.22% ... ;-)

RAB


P.S. As a point of reference, I am a contract Network Engineer. Over the past 14 years, I have had 27 employers so I am *intimately familiar* with the emergency fund process.


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Author: AFool4Love Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 59952 of 308451
Subject: Re: emergency fund while in debt? Date: 3/1/2001 9:52 AM
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Count me in on the "pay down the debt" side. I have no emergency fund at all. I get down to $10-15 in my bank account before payday because I am throwing every single penny I can towards my debt. Does this scare the sh*t out of me? You bet. But I think for me it's the best way. If I have money just sitting in my bank account, I know that some "emergency" will come up. By keeping myself down to the bare minimum, I am constantly reminded that I am poor right now! If I don't have it, I can't spend it. Not spending money in my account is harder for me than not using the credit cards... cash just sort of evaporates around me. And not using the credit cards is really easy when they're in the freezer!

I don't have what I'd call a keen financial mind, but I do sort of grasp the compound interest thing... and I know every extra half-payment I can make now will save me tons later on down the road.

-AFool4Love (why the name? coz the reason I'm so poor is that I'm putting my partner through college... our tuition payment is larger than our rent! oof! but I consider it quite an investment. <g>)

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Author: mlomker Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 59956 of 308451
Subject: Re: emergency fund while in debt? Date: 3/1/2001 10:15 AM
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coz the reason I'm so poor is that I'm putting my partner through college

Good luck with that. I put my boyfriend through school and he moved out the day he found a job. I guess some investments are better than others. Where's the SEC when you need them? :)



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Author: AFool4Love Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 60139 of 308451
Subject: Re: emergency fund while in debt? Date: 3/2/2001 1:10 PM
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UGH! Sorry to hear it. What a rat! I feel about a safe as I could be, but no one can ever be 100% sure about these things... so maybe we're foolish, but at least you and I are fools for love, and not for greed or a million other things!

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Author: hdllyn Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 60249 of 308451
Subject: Re: emergency fund while in debt? Date: 3/3/2001 11:00 AM
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Yes you should pay down your debt. It is a sound financial decision. The emergency fund is something that is sound also, but can be set up slowly. Working with a budget is the best solution. Planning and preparation within the framework of a budget will build you up a secure nest egg. It takes time, but is well worth the effort. Just don't stop everything to build up that emergency fund. Work it up slowly. Once you are out of debt, build up a small fund that can be easily liquidated. Once that is done, get into investing and have your money earn you money for a change!!!

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Author: wingedinvestor One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 61861 of 308451
Subject: Re: emergency fund while in debt? Date: 3/16/2001 12:59 PM
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3/16/01

Dear Jomejamo: sorry to take so long in responding to your note. Presume you've heard lots of advice already. Some of it may be good.

First, I want to applaud you for a) recognizing you have a problem, b) working on it, and c) being able to consider saving in spite of it all! I applaud you. You will get "there" - to full solvency.

OK, let's talk about the debt for a minute. Yes, I'd certainly recommend getting rid of the most expensive ones first (the ones with the highest interest rate). This doesn't mean soup and crackers forever; it does mean no expensive movies, fancy clothes every few weeks--you get the picture.

Second,saving money is always good. Think of it as "psychological discipline". It isn't easy. But, yes, even in these tough times for you, a little something put away each week, or two weeks, or each month will do wonders for you.

Let me ask you to imagine a scenario: close your eyes and see yourself say, 10 months from now. Your debts from credit cards are paid off with that last check. And, as you gaze at that new, separate checking account (or money market fund), you see it has a BALANCE OF REAL MONEY! Your money. You saved it. During the most difficult times--the times when you were scrimping, had bills to pay, AND paying off old bills as well. You still managed to save SOMETHING! It won't be thousands of dollars; it may only be a few hundred. But, imagine the lesson and the rightful pride this gives you: "I can, in the hardest times that I've encountered, do more--I am disciplined." That, to me, would be a heckuva message.

Finally, let me close by saying Jane Bryant Quinn is excellent and, yes, you might like to strive toward her financial goals. However, your situation may be different than her ideal one. Do save a very little and use the rest to pay off the debt. Maybe you could do an estimate of the time it'll take to pay off all your debts. Rough estimate. Then figure out five percent of what your payments would be and put that amount into savings. So, let's say you think you can allocate $400 per month to paying off your credit card debt. Take $20 and put it in a dedicated account separate from everything else. No, it won't get you to Ms. Quinn's number fast. And, yes, you would be far better off with a funded emergency fund. But, just like you're not going to pay off that debt in a few weeks, it's going to take a little while to get that emergency fund, too.

I wish you luck.

Bill

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Author: thinkmike Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 65499 of 308451
Subject: Re: emergency fund while in debt? Date: 4/9/2001 12:16 AM
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Emergency Fund vs Paying Down High Interest Credit Card Debt.

That is certianly a tough question. Some companys recommend this, and others recommend well something else entirely. I lost my job around the 15th of March, victim of the dot.com stock thing-a-ma-do-hicky. Anyhow.

I luckily had a small EF of right at $1000.00 and a very agressive paydown plan for my debt. And do to a wonderus mishap with getting a low interest credit card, had $2000 in cash that would have paid off a bill. But due to the mishap, i paid down the bill with other funds in cash, paid the money for the mistaken balance transfer, then finally after about a month got my overpayment from a *Paid* off credit card.

Differences between EF & CC.

EF - Cash, can be paid for anything, no charge, etc.
CC - Must take VISA, MC, AMEX, ETC. If they don't take CC like your mortage, you get to pay fees, probably an exorborent interest rate on your cash thing, etc.

Not to mention if you DO use your credit card, chances are you will *buy* a little more than you should. Why? Being laid off is a very, very stressful time, and can lead to overspending, or over-anticipated, be back to work soon session.

----------------

After reading some posts, and doing some research, my plan is to just bite the bullet. and put away a minimum of 6 weeks of expenses, and then start paying things off. Aside from the time where I am HAVING to pay the MINIMUM payment on things. [first time in like a year that I have had to do such a thing], and the associated get settled into work, I have probably put myself back by $4000.00 total and maybe 3 more months to getting things totally gone. Which is not to bad, but it in itself is not great. I did spend about $1000 on books & testing to help me be in a better position to get a job. And I spend money on a laptop to help me be able to work, look, to get a job, etc. I probably could have gotten by without a laptop, but I was getting nothing done without one due to the nature of what i do. (computers. yuck.). And I am not even sure how i spent the rest, but let me just say, i know I could have done without a good bit of it.

I will be making the minimum payments to build up the 6 weeks of expenses. And I am fortunate, I do not have very many expenses. So based on what you do, that should constitue how much you put aside.

Things to think about.

CellPhone/Pager Bill (if applicable)
Internet Access (if applicable)
Auto/Life Insurance
Corba Medical Coverage (oh this one sucks... estimate like 200 for a single, 400-450 for a family per month.)
Electricity
Gas
Phone
Water/Sewage/Trash/etc
Mortage
Food
Car Payment
Credit Card Bills Minimum Payments

I would also look at ways to cut the el-expenditures from the living below your means.

Feel free to e-mail me for anyquestions. no telling when i will be up to reading this board again. It is hard to read something that you know exactly what you want to do, but can't do.

(oh, 6mths same as cash on the laptop, so i wasn't too too crazy).


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