No. of Recommendations: 3
I go back and forth on an e-fund. We had a cash windfall last month, and have used that to convert our operations to a cash basis, rather than charging operating expenses and paying in full, which is how we've done it for years. That feels like a big step! I'm having a hard time imaging that putting 100/month aside will matter more than paying the debt down.

There has been a lot of debate on the subject of creating an e-fund versus just paying as much as you can on the debt. As I understand the arguments made, for and against an e-fund:

Against: The debt is at a higher interest rate than the savings. Paying more on the debt avoids more interest expense than putting the money in the e-fund will earn. If you have an emergency, you just create more debt.

For: You may not be able to create more debt on as favorable terms as you have now. Creating the efund allows you to support your cash basis lifestyle, because the inevitable emergency then does not require creating more debt. In effect, you create your own "cash windfall" over time, to be used when it is truly needed. Most importantly, you get in the habit of putting money in savings. Once you see how hard it is to build up savings, you learn not to spend on things that aren't worth that much effort.

IMO, the psychological factors dominate. I will always favor having the e-fund. This is not necessarily the best idea for everyone, but I really like it for people with a lot of financial uncertainty in their lives.

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