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Let's say you woke up today and were debt-free, but had no savings or efund. Let's assume you have a stable job, stable health, and a life--however you define those. Would you borrow money to stash it into an efund?

If so, at what interest rate would you NOT borrow the money?

Funny thing--at the end of February, 2004 I was facing a choice very much like that. I came out of divorce court with an obligation to pay the ex a settlement that would eat up substantially all of my cash reserves. The original plan would have been to build the e-fund over time, having spent the e-fund on the Mother of All Emergencies.

Murphy's law rules that emergencies happen at times like this. While I was driving back from divorce court, Bambi's mother decided to conduct a suicide attack on my car. The insurance settlement on a 14 year old car was not enough to pay for as reliable a replacement.

I could have paid cash for the replacement car by drawing my short term savings down to absolute zero and funding a small part of the divorce settlement from longer term investments, which I thought I was saving towards daughter's college. Instead of drawing the short term savings down to absolute zero, I borrowed to buy the car. I paid 5.2% interest on a 3-year loan, which was the best rate offered by my credit union for that type of loan at that time. (For reference, I think ING was paying a bit less than 2% at the time.)

Now, here's the funny psychological thing: I borrowed at 5.2% to buy a car so I wouldn't be in the position of having absolutely no e-fund. From a financial analysis perspective, this is pretty much the same as borrowing at 5.2% to create an e-fund. But there's no way I would have borrowed at 5.2% just to put cash in savings. I would have tried to build the e-fund out of monthly cash flow, and only borrowed if an emergency bigger than the e-fund came up to justify it.

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