Fund Emergency Savings or Pay off Debt?

My goal is to have $1,000 in my emergency fund. However, I'm not sure of what I should focus on first. We currently have around $50k in debt (mostly student loans) and we are really sticking to our budget to pay off as much debt as possible in the next couple years. Should we forget about our emergency fund and use that money towards debt?

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  • Well, what happens if you have an emergency? Will you have to take on more debt to pay for it? It would be credit card debt most likely which I'm guessing has a higher interest rate than your student loans. I personally would pay the minimums on debt until I could save up a minimal emergency fund of $1,000 and then return to debt paydown.

    However, to be clear, I am coming from a personal disposition of not being bothered by the existence of student loans and mortgage debt. I only pay about $15 extra per month on my mortgage and the only reason I do that is so it can be a round number. When I had student loans, I didn't pay extra on them until I paid a lump sum to clear the debt. And the only reason I did that is because I had 3 years where I had basically no living expenses so I though I may as well take that chunk I've saved up and pay off the loan. Otherwise, I would have plodded along for the next 10 years paying the minimum. YMMV.

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    • WordTenor
    • Arranged the menu, the venue, the seating.
    • WordTenor
    • 11 mths ago
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    Student loans are an unsecured, usually low-interest, installment debt. Each of those things is a reason to make them lower priority than other types of financial security. I would clear any secured debt (car loans) and any revolving debt (credit cards) relatively quickly, but I wouldn't even begin to pay extra on the student loans until I had a substantial emergency fund, far beyond $1,000. And I would definitely build up a small emergency fund before even starting to clear the revolving debt. 

    There are people who fancy themselves financial gurus (ahem DR) who advise that all debt is equal and you have to get it gone ASAP. But the fact of the matter is, if you have an emergency, as @jenmas  points out, and you don't have the money for it because it has all gone to the student loans, you have no way of accessing that money. Your only option will be to take it back out on some sort of higher-interest loan. Mathematically, that is crazypants. 

    Reply Like 4
      • Salmon Case
      • Salmon_Case.2
      • 11 mths ago
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      WordTenor Thanks for the advice. We have 2 credit cards and a car loan totaling about $11k. So do you recommend getting to a $1k small fund first, then a 15k+ fund AFTER I pay off the $11k?

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      • nolesrule
      • YNAB4 Evangelist
      • nolesrule
      • 11 mths ago
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      Salmon Case What are the interest rates on all your debts? It's impossible to give an informed opinion without that information. It would also help to know the CC and car loan balances as well as the car loan payment.

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      • jenmas
      • jenmas
      • 11 mths ago
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      Salmon Case Do you or your partner have any on going health issues? How stable are your jobs? For example, if you had diabetes and it seemed like your company that provided health insurance was maybe going to have layoffs, I would be saving up a big emergency fund in case I lost my insurance but still needed to be able to afford insulin. However, if I were overall healthy and in a stable federal government that is really hard to get fired from, maybe I'd just do the mini-fund of $1K before going to pay off my credit cards and car loan. Also, is your car in good condition other than routine maintenance? If not, you need to consider savings for car repairs so you don't get stuck putting it on a high interest credit card. The $1000 is the bare minimum.

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      • Salmon Case
      • Salmon_Case.2
      • 11 mths ago
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      nolesrule  The 2 credit cards are interest free (right now). I think the interest catches up on one in May 2019 and the other in 2020. The car loan interest is around 4%. Our car payment is $233 monthly. Our balance is around 6,500.

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      • Salmon Case
      • Salmon_Case.2
      • 11 mths ago
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      jenmas  My wife and I are both young and healthy. No lingering health issues. We also have very stable jobs and there is no concern of losing them any time soon. Our car is about a 7/10 with regards to mileage/condition.

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    • nolesrule
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    • nolesrule
    • 11 mths ago
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    The only debt that I would consider liquidating an emergency fund  would be credit card debt, because in the case of an emergency you'd just draw from the credit card and would not be worse off than when you started.

    If you pay off any other type of debt by eliminating an emergency fund that you cannot redraw, you'd have to draw from a credit card at a high rate to pay for the emergency, which would only make things worse.

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    • HappyDance
    • YNABing consistently since 2014
    • HappyDance
    • 11 mths ago
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    In debt-pay-down mode I established my initial emergency fund at $1,500, which was about half my monthly income, and after a couple of scares, I slowed down my debt-payments to minimums while I got a month ahead (leaving all this month's income in the bank account untouched to budget next month).  Admittedly, this is a very conservative approach, especially if you have high-interest debt and you feel the constant pressure of interest accruing.  But, in my situation, I needed to take into consideration that I had also closed all credit accounts.  Knowing I had no access to credit of any kind, it soon became obvious that I needed to keep some cash liquidity and timing flexibility in my own hands.

    Reply Like 4
  • Second the opinion of throwing emergency fund money toward high-interest CC debt. (There's not too many emergencies you can't handle by swiping your card if it came to that.) The main reason you even have that "emergency" money now is that you didn't send it to the CC when you should have in the past. 

    Accelerate low-interest student loan payoff after rebuilding an acceptable cash emergency fund again.

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