3-6 month Emergency Fund or Get out of Debt?

KJLR2012 · August 2013

Dave Ramsey suggests in his baby steps to 1st save an emergency fund of $1,000, then pay off ALL debts, then build a true emergency savings fund of 3 to 6 months expenses. I am nervous to only have $1,000 in savings while paying off all of our debt. Anyone else feel the same way? We have about $50k in student loans and $15k in car loans to pay off. I feel like it will take us a few years to pay those debts off and having only $1,000 stashed away seems very small. I know there is probably good reasoning behind Dave Ramsey's method. Someone enlighten me!

brij2006 · August 2013

We actually have 3 months in our E-fund since that's what we felt more comfortable with. We also have it set up so we can still pay all bills on 1 of our salaries. So that helped too.

You can do what makes you feel comfortable. If that's 3-6 months, then build that up first.

anssett · August 2013

Partly, it's psychological. The more progress you make on your debt the more you'll want to keep going. Also, 1K will cover most things like a car breaking down (which you could budget for car repairs and reduce the impact of!). If you actually got laid off you'd stop the debt payments (snowball) and focus on the short term. Most people won't get laid off. That extra money will help their debt and their peace of mind about the overall money situation more.

I struggled with the concept, but now I'm through it and we have the big comfy 3-6 month cushion in the bank. I'm much happier.

KJLR2012 · August 2013

It definitely makes sense. I've been trying to do a little of both (save towards full emergency fund and pay off debt) at the same time and it's kind of frustrating. We have $3000 in our emergency fund now and have been paying bigger payments towards our debts, but it's not happening as quickly as I'd like. Perhaps if I stop contributing towards savings and focus on debt it will make me happier about our finances in general? Seeing our savings account grow DOES give me great pleasure though.

Sisugal · August 2013

The 1K advice was given in a different economy - not sure if he still is advising that amount.

I would definitely not be comfortable with that - I would want a minimum of 3 month's expenses.

Then pay off CONSUMER debt - CC, vehicles, etc.

Then look at your student loans - Look at interest rates and pay off any high interest rate loans and take your time on the low rate loans.

I am a fan of a paid off mortgage, but if you have one of those mortgages at 2-3%, I would pay extra each month to principal, but not be in a hurry and use the extra fund to add to savings, retirement and other financial goals.

vlagrl29 · August 2013

1k is just not enough for us. we want 3 months before we start putting more in retirement and paying off my school loan. My school loan is super low interest rate: 2.85 so I'm totally ok with that. We are self employed to having a bigger efund is important and we just purchased a disability policy if anything happened to DH to where he couldn't work. All that makes me feel better.

MommyLiberty5013 · August 2013

I agree with Sisugal. I have always thought $1k was way too low for an e-fund. Any car repair that absolutely needs to be done to make your car run and be safe is probably going to be over $1k or at least close to it. Same with an unforeseen medical bill. Think how much one trip to the ER costs...even with insurance!

I would go for 3 months first in the e-fund.

Then tackle vehicles and CCs.

Leave SLs to after vehicles and CCs.

KJLR2012 · August 2013

I think you guys are right. We will continue to grow our savings to $10,500 (3 months expenses for us) and then pay off vehicles and then student loans. Pending unforeseen circumstances, I think we can be debt free (minus our house) in 7 years! That seems like such a short amount time in the grand scheme of things.

KJLR2012 · August 2013

Hmm, I'm suspicious of your links since I'm at work...anyone else dare to click?

vlagrl29 · August 2013

SCAMMMM.....reported!

brij2006 · August 2013

Thank you @vlagrl29 I was considering checking it out.

vlagrl29 · August 2013

if it seems too good to be true, it is. LOL

Wulfgar · August 2013

For us, we are slowly building our emergency fund $100 a month while we work on paying off our car loans and student loans.

For us, we know that until we get needed repairs to our house done we will not be truly debt free. The last major work done our house was in the 1980's and things like the roof and furnace are 20 years old. The kitchen cabinets are closer to 50 to 60 years old so we know that for the next ten years a lot of our freed up money will be going to necessary home repairs.

Mama-Bear · August 2013

Sisugal said:

The 1K advice was given in a different economy - not sure if he still is advising that amount.
I would definitely not be comfortable with that - I would want a minimum of 3 month's expenses.
Then pay off CONSUMER debt - CC, vehicles, etc.
Then look at your student loans - Look at interest rates and pay off any high interest rate loans and take your time on the low rate loans.
I am a fan of a paid off mortgage, but if you have one of those mortgages at 2-3%, I would pay extra each month to principal, but not be in a hurry and use the extra fund to add to savings, retirement and other financial goals.

Just as an FYI he still suggests $1k. He redid FPU about a year ago and that's still the advice he gave and what he'll suggest on his radio show. We follow him pretty closely (not 100%) because he's the millionaire, we're not, obviously he's got it more figured out than we do.

Sillygirl45 · August 2013

Personally, Dave Ramsey cracks me up. He's like Dr. Phil for money. It's total common sense. If you don't know you should be paying off your debt, figuring how not to accumulate more, and investing the rest, you have no common sense (not you personally, just saying). He's the millionaire because he is selling common sense to the rest of us.

IMHO, you need x amount in cash for things that cannot be paid for on credit ($1,000 doesn't sound too bad). It all depends on your lifestyle. You then need to put all leftover money toward your highest interest rate, or smallest debt depending on which is going to cost the most in the long run (if you owe x at 7%, but owe x at 14% you actually have to figure out how long/how much to pay down each. if 7% is paid off with no interest after that, 14% paid down plus what you were paying on 7% may still be better to pay this off last) It takes some figuring, but is worth the time and energy.

We have a 3.75% mortgage. Even though it is that low, we will save tens of thousands and 10 years on our mortgage paying only $200 a month more.

Sorry if this got a little long, it was the Dave Ramsey that got me going!

vlagrl29 · August 2013

Sillygirl45 said:

Personally, Dave Ramsey cracks me up. He's like Dr. Phil for money. It's total common sense. If you don't know you should be paying off your debt, figuring how not to accumulate more, and investing the rest, you have no common sense (not you personally, just saying). He's the millionaire because he is selling common sense to the rest of us.

IMHO, you need x amount in cash for things that cannot be paid for on credit ($1,000 doesn't sound too bad). It all depends on your lifestyle. You then need to put all leftover money toward your highest interest rate, or smallest debt depending on which is going to cost the most in the long run (if you owe x at 7%, but owe x at 14% you actually have to figure out how long/how much to pay down each. if 7% is paid off with no interest after that, 14% paid down plus what you were paying on 7% may still be better to pay this off last) It takes some figuring, but is worth the time and energy.

We have a 3.75% mortgage. Even though it is that low, we will save tens of thousands and 10 years on our mortgage paying only $200 a month more.

Sorry if this got a little long, it was the Dave Ramsey that got me going!

I know what you mean. I feel like he is common sense too. I have never read any of his books. I felt like I got more out of the David Bach book. I still think $1,000 is not enough but that's just how I feel. $6K is what I want us to get to then I will put more money towards things that we haven't.

Mom987 · August 2013

He still recommends $1,000 and also recommends paying off your smallest monthly debt first, because you can tackle that small one more quickly and then the money you save from that can forever to towards the bigger one. Let's say car is $300/month and student loan is $450, tackle the car as fast as you can, and then when it's paid off you can put that $300 that used to go towards the car towards student loans, so all of a sudden it's $750/month and still is the same dollar amount as when there were two debts, but you'll feel more confident. We had our $1,000, then paid $200/month towards the 3-6 month fund while still tacking two car loans. So we didn't completely forget about the 3-6 month part, we didn't go crazy with it either.

3-6 month Emergency Fund or Get out of Debt?

Re: 3-6 month Emergency Fund or Get out of Debt?

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