WWMMD: Emergency Fund Vs. Debt

athlete010688 · May 2014

We have finally gotten our emergency fund built to Dave Ramsey Baby Step 1. I currently have $1500 in it right now. Would you take the other $500 and pay off debt, or just leave it at the $1500? We also have a rental property we own...I'm not sure if that would change your opinion or not.

To me...it just seems that $1000 is such a low number!

vlagrl29 · May 2014

I would actually beef up the emergency fund. We just got ours to 3 months living expenses. $1000 is such a low number these days. 1 car repair or hospital visit and deplete it all.

athlete010688 · May 2014

Well, that's my ultimate goal. But I really wanted to start paying off our debt (car loan, medical bills, furnace for rental). So I was thinking about leaving the emergency fund alone and putting the $250-$375 we put in/month towards our debt.

brij2006 · May 2014

I'm a fellow DR TMM follower and would keep the E-fund at $1,500 and not add to it.

The whole purpose is to get out of debt quicker. If you're spending the first 1-2 years slowly building an E-fund then you lose traction and most people don't continue on the plan.

Xstatic3333 · May 2014

Honestly, this is just not something I agree with DR on, especially for property owners. I would build it up to at least $5,000 before making large extra debt payments. You don't want to be stuck if your rental property needs a new boiler or something suddenly.

ETA just saw that's already happened...you get the idea though. Build up a cushion so you can pay cash for that stuff going forward. Good luck

brij2006 · May 2014

Also going to add that the $1,000 does seem like a low number. We were those people who had $70k in debt, but had a fully funded Efund. The point is that you get the snowball going from the start, and that creates a bigger buffer in your monthly expenses. Last month we had the battery in my car die and a tire with a slow leak in it. Both would be considered emergencies. We were able to handle that situation with our monthly budget and not even dip into the Efund to pay for the expenses. Since we already had an extra $200/month in our debt snowball from the other debts that were paid off.

DR says in a month of emergency, you do not do the snowball and pay for the expenses. It caused us to put $150 less toward the snowball in April, but we handled that situation a lot better in the TMM plan than we would have on our own plan with a fully funded Efund. We would've made it the excuse why our budget was blown for the entire month.

athlete010688 · May 2014

Xstatic3333 said:

Honestly, this is just not something I agree with DR on, especially for property owners. I would build it up to at least $5,000 before making large extra debt payments. You don't want to be stuck if your rental property needs a new boiler or something suddenly. ETA just saw that's already happened...you get the idea though. Build up a cushion so you can pay cash for that stuff going forward. Good luck

That was my thought as well! Luckily though - we have the furnance on an interest free credit card, and we're paying it off with the extra each month from the rental. We have until 2/15/15 to pay it off in full (which it will be).

hoffse · May 2014

I disagree with DR on this one too (among other things). You can blow through $1,000 in an instant, especially if you're a property owner. Not saying you need 3-6 months of living expenses just yet, but if you need to replace a furnace (or where I live, the A/C) in season, that's one of those things that really MUST happen right away. You need enough to cover those kinds of expenses.

I understand where Brij is coming from in the sense of how much you snowball can be used during an emergency month. We snowball a good bit, and we are also saving a LOT right now because we're saving for a house. If we had an emergency month, H and I could find $2,500 in our budget before we needed to dip into the house savings at all. But you're literally talking about having a buffer of only $275-$350 during an emergency month. That's not nearly enough for me to comfortable with $1,500 in savings.

If it were me, I'd work to get it up to at least $3,000-$5,000 before even thinking about starting the snowball.

ta78 · May 2014

I personally would start snowballing with $1500 in savings. I guess it depends on the amount of your debts also. I would especially knock one out if it's a low balance. You then have that extra money in case an emergency does come up.

This is something that is different for everyone's comfort levels.

athlete010688 · May 2014

ta78 said:

I personally would start snowballing with $1500 in savings. I guess it depends on the amount of your debts also. I would especially knock one out if it's a low balance. You then have that extra money in case an emergency does come up.

This is something that is different for everyone's comfort levels.

Here's our outstanding debts:

Type of Loan	Monthly Payment	Balance Remaining	Interest Rate
Car Loan - Hyundai Genesis	$ 242.65	$1,180.61	2.81%
Credit Card (Furnance)	$153.12	$1,531.16	0.00%
Medical Bill #1	$137.27	$2,470.90	0.00%
Unsecured Loan - Highlander & VFR	$ 415.92	$23,117.93	2.39%
Medical Bill		$950.20

Total Debt (not including mortgages) come to $29,250.

Here are some explanations:

The Credit card is for the furnance at the rental. It is 0% financing until 2/15/15.

Medical Bill #1 is 0% financing for 18 months. I haven't received our first bill yet, as I just set up the finance offer this month.

Medical Bill #2 is still "pending". I had applied for financial assistance. I haven't heard back yet. If we don't qualify, it'll at least be 0% financing for 18 months.

The unsecured loan (majority of our debt) is a for car #2, and DH's motorcycle. I recently refinanced it through LightStream.

I just feel like we're so far behind in financial planning.

brij2006 · May 2014

Here are my suggestions. They may come across as rude, but understand that these are the suggestions DR would probably give you also.

1. Put the rental on the market. Get rid of that debt and expense. Not to be rude or mean, but if you have to put repairs on a credit card then it isn't the best time to be a landlord.

2. Sell the motorcycle.

3. Pay the minimum due on the credit card and medical bill and apply your snowball payment and extra from the CC and medical bill, toward the car. Once that is paid off, then apply that payment toward the 0% card. If I'm calculating correctly, that would put the car at being paid off in 2 months (assuming $100 extra from CC + regular car payment + $100 from medical bill (assuming a $50 minimum for each the medical bill and CC) + $300/month in budget = $742.65/month). Then the CC would be paid off less than 2 months after that (CC payment + car payment + $100 from medical payment + $300/month in budget).

So after the first 4 months of doing your snowball, you will have an extra $885/month in your budget and the car and CC paid off. On top of the $1,500 in your Efund.

That's the whole point of his plan. It's to aggressively attack the first debt while paying the minimums on the others, because you will get to them sooner than if you paid the calculated amount to have it paid off before the 0% interest is done.

In that $885/month you could also pay off the 2nd medical bill in cash the month it comes in. Then you could call in and ask for a cash discount for paying it in full (which they almost always give). This is what we did with our infertility expenses in January, and it was so awesome to not need to work up a payment plan for a $1,200 medical bill.

strickland8052 · May 2014

Your debt is not that bad, considering that it is all really low interest rates. Have you tried asking the hospital if they will lower the amount owed if you pay it all up front? My mom has negotiated a $1,000 bill down to $500 just by offering to pay it all up front. If they won't do that then I see no reason to worry about paying extra on the 0% interest debt. There is absolutely no incentive to paying it off early whatsoever. However, do make 100% sure that it is completely paid before that 0% interest goes away. (If it isn't paid off, you could end up owing interest for the full original amount.) I also would not worry about the Hyundai loan. It is also a low interest rate, and the car will be paid off by the end of the year anyway. The number one debt that I think you should focus on is that Highlander/VFR debt. The interest rate isn't so much alarming, but it is set to take 4 years to pay off. If you are not already underwater with it, I imagine that you will be underwater with that car if you don't pay it off before then. How much extra do you have each month to throw towards extra on the debt/e fund? I might recommend applying half that extra cash towards an e fund and the other half towards the unsecured loan. All of this is probably contrary to what DR would say, but frankly I do not agree with him. Rushing to pay off 0% interest debt does not make any sense. That money would be better served (and more accessible in the event of an emergency) if it were in a credit union account accruing just .10% interest. Also, in today's economy, I think you need about 6 month emergency fund that could help you through a job loss, medical emergency, car emergency, etc. Hope this helps!

strickland8052 · May 2014

OH! And are you dependent on the rental income to pay the mortgage on the rental property? If so, I think the emergency fund becomes even more important. What would happen if your renter stopped paying the rent or suddenly left? Making sure you don't have to resort back to CCs in the event of an emergency is (in my opinion) way more important than paying off 0% interest debt.

hoffse · May 2014

Well I agree you should sell the motorcycle. They're really expensive to insure because you're WAY more likely to die riding one than driving a car.

Given that you're already a two-car family, the motorcycle is redundant, in addition to being expensive and unsafe. I mean, if your H is riding it with any frequency, you definitely need more than $1,500 in your e-fund. Just saying.

Not sure what you can get for it, but that ought to lower your insurance rates and give you a good chunk to pay off one or more of these outright.

I would still have more in my e-fund before sending everything extra to savings. At least $3K. Obviously that's a personal preference, but I just feel naked without it. You're halfway there, and it wouldn't take long to get the rest of the way there. In fact, I might apply a bit from the motorcycle to boosting the e-fund to $3K and then start the snowball with everything left.

As you can see the e-fund vs. debt thing is a point that reasonable people disagree on. You need to do whatever makes you feel comfortable.

Wulfgar · May 2014

I would use your Emergency fund to pay off your medical bills, that is what the emergency fund is for then you can rebuild it back to $1500. Then I would pay off your smallest debts first.

As my wife and I have found out the hard way last year, if you have a lot of medical bills all at once it can really suck down your emergency fund.

athlete010688 · May 2014

Thanks for all your suggestions!

vlagrl29 · May 2014

Thinking back a couple years ago, we did pay off our medical bills and personal credit cards first and then built up an e fund of 3 months living expenses. Now we are contributing more to retirement.

jtmh2012 · May 2014

athlete010688 said:

Here's our outstanding debts:

Type of Loan Monthly Payment Balance Remaining Interest Rate
Car Loan - Hyundai Genesis $ 242.65                 $1,180.61 2.81%
Credit Card (Furnance) $153.12                    $1,531.16 0.00%
Medical Bill #1 $137.27                     $2,470.90 0.00%
Unsecured Loan - Highlander & VFR $ 415.92                   $23,117.93 2.39%
Medical Bill $950.20

Unlike most people here, I don't consider car loans "debt". Not in the bad sense anyway. I would make the required payments on those, especially at those low interest rates. Focus on the medical bills and the CC debt. And like the other poster said, try to get them paid before the 0% offer expires if there's some sort of "gotcha" on that (like owing all interest since the beginning).

As for the car loans, you're only 5 months away, you'll have that paid off by the time you get the other stuff paid off anyway. You could take that payment and put it toward the others. Once you've paid those off, only then would I worry about the other car/motorcycle loan (but still make your required payments just to be clear).

hoffse · May 2014

I agree with jtmh - car loans are not "bad" debt in my mind because they're super low-interest.

I just think you should sell the motorcycle because it's redundant, unsafe, and expensive to insure. Until some of your other obligations are paid off you don't have a huge amount of wiggle room each month, and your e-fund is not big enough to own a third vehicle, IMO.

Mom987 · May 2014

We keep $1,000, but we also keep our checking at a minimum of $1,000 each week to draw bills from, so to us we usually have $2,000 while bills are coming in and out before payday.

Mom987 · May 2014

So, I would probably keep the $500 in there, unless you get close to a debt being paid off and then splurge on it.

KatieCutie05 · May 2014

Your debt is not bad at all... given your low balances on most of them - i would definitely lower the EF to just 1,000 because 500 would pay off most of the the medical bill - 500 makes more of an impact to you right now in the debt instead of in the EF - you can easily free up that 500 in your monthly budget. We have just the 1k in there right now and so far all the emergencies that have come up, (car repairs and medical bills) we just pulled out of our budget. Once we have a kid we'll up it to 2k because we'll have less wiggle room in our monthly budget to cover those kind of expenses.

ta78 · May 2014

I would pay the extra $500 toward your credit card bill. You won't get it paid off before the 0% interest ends if you only pay the minimum payment and you do not want to pay all the back interest. Plus knocking that one out sooner will free some money you can either start building back up your efund or snowballing it into another debt.

daisy662 · May 2014

You don't say what your income is, but if it is on the lower side, I would sell the motorcycle and the highlander and pay off the other debt. There isn't much there and you should be able to pay it off quickly. If you have nice incomes then just keep paying on it as quickly as possible. Good luck!

athlete010688 · May 2014

daisy662 said:

You don't say what your income is, but if it is on the lower side, I would sell the motorcycle and the highlander and pay off the other debt. There isn't much there and you should be able to pay it off quickly. If you have nice incomes then just keep paying on it as quickly as possible. Good luck!

WWMMD: Emergency Fund Vs. Debt

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