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It looks to me there is no way around building up some form of liquid e-fund.

Generally, you shouldn't rely on being able to access the retirement money before retirement, so it is a good idea to have an emergency plan for handling at least the more normal emergencies.

A lot of people, including myself, feel that an emergency fund is a good way of handling a cash emergency. The emergency fund would then be savings someplace that is both safe and liquid, such as a money market mutual fund (MMF) at a major fund family or a major brokerage, a money market deposit account (MMA) at a credit union or bank, or (if one hasn't built up enough to open a MMF or MMA account) a regular savings account. Usually a well-funded emergency fund is considered to be 3 to 6 months of living expenses, but individual situations may suggest less (e.g., two wage-earners working for two separate companies that are not dependent on each other) or suggest more (one wage-earner with dependents and the bulk of the income fluxuates, such as sales commissions, or one thinks one's job is at high risk).

Some people feel that tieing up a significant chunk of money at a relatively low yielding savings instrument is a waste of money and their emergency plan is a line of credit, such as a home equity line of credit or available credit on one or more credit cards. That frees up more money for debt reduction or investing instead of having that money just tread water.

I don't like a line of credit as an emergency plan because if one borrows for a cash emergency, one still has to be able to make at least the minimum payments (and if one is out of cash...?), and some lines of credit will dry up as soon as the lendor finds out that one's income has stopped.

Usually, while someone is paying down high interest debt, I suggest setting up a "mini emergency fund" of $1,000 to $1,500. One person has suggested a "mini emergency fund" of the equivalent of 1 month of living expenses. The "mini emergency fund" is a compromise: you can use cash for the more routine cash emergencies, but would end up having to tap into one's available credit for the bigger cash emergencies, but fortunately the larger cash emergencies tend to be less frequent. This will give one confidence of being able to handle some problems without relying on credit, handle those smaller problems without watching one's debt balance go the wrong way, and be good training in having a stash and not raiding it except when really necessary to do so. Yet the amount is small enough that the "opportunity cost" of not using it to pay down debt is managable.

In reality, different people come up with different decisions on how much emergency fund to build up while paying down high interest debt, some people having no emergency fund at all but having an empty credit card for cash emergencies (so the empty credit card would float the emergency while still able to track long-term debt on the other cards), to where some people will build up a full-fledged emergency fund concurrent with debt pay-down. Part of the picture involves people's comfort levels, part on what other resources are available to them.

BTW, in one of the discussion groups, I think it was on Morningstar, there was an informal poll on how long it took to build up an emergency fund once one decided to concentrate on that financial goal. Most of the responses were in the range of 2 to 5 years.

I think 80% debt pay-down / 20% build up emergency fund sounds like a good split on one's discrtionary money, then switch to more debt pay-down when the emergency fund reaches your target point. Nothing is cast in stone, so you can adjust this as your needs change.

Part of one's emergency plan probably should include medical insurance and disability insurance if your employer doesn't offer them--medical expenses can grab a big chunk of one's cash even for relatively "routine" operations. I'd also add life insurance if one has dependents depending on your income.

I wish you best success on your debt elimination plan and on reaching your financial goals!
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