Pay off debt from e-fund?

Stephanie2167 · January 2015

Need your advice. My husband and I both work full time. We have three girls (4, 13 mo., 13 mo.). Christmas cost a whole hell of a lot more than we expected. How did that happen? Well I can only blame myself. Now we're trying to get ourselves out of the CC debt and work on putting money away for a good down payment on a minivan for me in the next year.

Both of our cars are paid off. We pay $2100 a month in daycare. Our one credit card is $5k (barf). And we have $45k in our e-fund. Our monthly take home is $7400 after retirement and dependant care account.

I know Dave Ramsey's mini steps are debt payoff first then e-fund. I'm just so afraid fo taking that money out of our e-fund and it never getting paid back. Which would totally be my fault. (I do the finances).

I get my bonus in 2 weeks and then our tax return is coming.

What would you do?

hoffse · January 2015

With that much in your e-fund I would probably just pay it off, and I'm not a DR follower at all.

Pay back your efund with your bonus and tax return, and just be diligent about it.

There's no reason to have that credit card debt, especially not when you have that much just sitting there in an e-fund. You're in full control of your money, so there's no need to allow fear to rule you here. If you are determined to pay back the e-fund, then it will be paid back. If you are lax about it, then it won't happen. But you're in control here.

jessica490 · January 2015

I agree with Hoffse and just pay it off...you have plenty in your e-fund!!

hoffse · January 2015

I would also add that if your take-home $7400 (really $5300 after daycare), you still should have PLENTY to live on and save for the minivan. What is your mortgage? Could you put aside $1,000 or $1500/month to save for the minivan so you don't have to touch your e-fund for it?

The alternative, of course, is to just buy the minivan with e-fund money. But I recognize that draining an e-fund for something discretionary can feel wrong.

The question of how much you really need in an e-fund is different for every person though. I adhere to the viewpoint that you need enough to pay your insurance deductibles or replace something major in the house (ie: A/C or heater) if it breaks. If you are a single-income household you need more in case the one earner loses his or her job. Since you are a dual-income household, you might need less if you could afford to live on a single income. H and I keep less in liquid accounts because we could live on one income if we had to, and that's a built-in emergency fund right there. Our e-fund is really for things like home repairs. The odds of us both losing our jobs and neither of us being able to find another one is really small.

So yeah, work with the numbers a bit and see where you can get with it. It sounds like you guys bring home enough to have some flexibility with how you pay for the minivan though.

KatieCutie05 · January 2015

45k in an emergency fund?! i'd pay off all the credit cards yesterday! Then after saving what you can for the car in the next year- i'd even we willing to take up to 10k out of the emergency fund to be able to pay cash for the car! But if your really saving i don't see why that would even be necessary. Don't sign up for vehicle debt!.... Even just 30 - 35k sounds like a perfectly healthy efund to me!

hoffse · January 2015

Oh and for future years at Christmas... I have a co-worker who adheres to the rule of, "Jesus got three, you get three." She says it helps keep her and her husband from going overboard, especially since the kids also get gifts from grandparents, aunts & uncles, etc. I think H and I will try to implement that when we have kids of our own. I could see us going overboard and blowing our budget around Christmas big time.

Car debt isn't necessarily a problem if the payments are easy. There's something to be said for financing a depreciating asset if you can get the interest rate super low (like 2% or less), rather than sinking too much present value money into it all at once. People who debt leverage (raises hand) often finance cars so they can use other money toward wealth building. You just need to strike a balance between the amount of money you put down and the cost of the ongoing payments so that you aren't hurting on either end.

Stephanie2167 · January 2015

We rent right now (military). $1600 a month. Does it matter that our e-fund will also be where we pull from when we finally purchase a home? Probably not for another 6-8 years.

I guess as long as we continue staying debt free (besides the car payment and daycare costs) we'll be able to continue building up our savings.

hoffse · January 2015

Stephanie2167 said:

We rent right now (military). $1600 a month. Does it matter that our e-fund will also be where we pull from when we finally purchase a home? Probably not for another 6-8 years. I guess as long as we continue staying debt free (besides the car payment and daycare costs) we'll be able to continue building up our savings.

So after daycare and rent you are looking at $3700/month for utilities, food, clothing, gas, etc. Seriously, you should have no problem living off of half of that if you have no other debt. Say you allocated $1850/month to utilities and living expenses and saved the other $1850/month. You could pay cash for a $20,000+ car by December - not counting any trade-in value from your old car - and your e-fund could be (I assume) paid back from your tax refund and bonus. Winning all around.

The other point is that if you continued to stick to that budget, you would have an enormous downpayment by the time it came time to buy a house. If you're 6-7 years off from that, though, I would maybe look into investing my DP savings.

In your case it's really just a matter of creating a budget and sticking with it.

vlagrl29 · January 2015

I would totally pay it off with that e fund you have.

Stephanie2167 · January 2015

Thanks everyone. I guess I just don't trust myself to pay it back. I'm a terrible online shopper and have been doing really good with cutting back. It's just something I HAVE to do if we want to move forward.

Plus, my oldest starts kindergarten in September so that will help a little with daycare costs.

hoffse · January 2015

Stephanie2167 said:

Thanks everyone. I guess I just don't trust myself to pay it back. I'm a terrible online shopper and have been doing really good with cutting back. It's just something I HAVE to do if we want to move forward. Plus, my oldest starts kindergarten in September so that will help a little with daycare costs.

I get this. Try not to get sucked into the deals. I broke myself of this about 18 months ago in an effort to really save aggressively for our house, and it was incredibly freeing. I had really just been shopping out of habit, not because I needed anything. After I cracked down, my habits changed. You can stick to just about anything for a year, especially if there's a big reward at the end (the car). You might find that once the year is up your habits have changed too, and sticking to the budget is no longer a real burden.

One thing that helped break me of online shopping is I de-enrolled in most of the email blasts that stores send out. I only kept a couple of them from stores I shop at weekly (Target, etc.). It's very nice not to be bombarded with that every morning, and it's much easier to prevent myself from shopping if I don't know that there's a 1-day sale going on or whatever. When I need clothes or other things like that I just wait until the next holiday weekend when I KNOW a sale will be happening. It turns out, I get the same bargains that I used to get, but now I only buy the things I need.

simplyelise · January 2015

I second the unsubscribing to emails! I also throw out the Bed Bath and Beyond and Victoria's Secret mailers without looking at them. If I have a planned purchase, I spend a ton of time researching and looking for coupons until I'm positive I have the lowest price.

hoffse · January 2015

AprilH81 said:

Do you have a budget that you actually STICK to?

You have plenty of income and not a lot of debt so I don't see any reason that you should have any problem using the emergency fund to pay off the credit card and replacing it fairly quickly.

Also, be sure that when you go to purchase your house that you still have money to buy furniture, make minor repairs, buy paint, lawnmowers, washer/dryer, etc. AND still have an emergency fund after the down payment.

Several of us have recently bought "new" homes and the amount of money that you spend is insane.

Truth.

Stephanie2167 · January 2015

We have a "budget" that we do not stick to. Obviously. Ugh.

Can I piggyback onto my own post with another question?

@hoffse made me think of something. So say I wanted to put $1500 away to start saving for a minivan. How would you do that? The first two weeks of the month are usually pretty brutal for us. With rent (1600 on the first) and daycare ($1100 for the first two weeks) that leaves us about $1000 to tackle the rest of our bills due during the first two weeks plus groceries, gas and my daughter's ballet class.

Then by the 15th, after another $1100 to daycare, we have $2600 for groceries, gas, cell phones, etc. Would you just automatically have $1500 taken out on the 15th or move that yourself monthly (in case that month you have other bills that come up (We pay our car insurance bi-annually so we get that bill in March and September). Does that make sense?

cbee817 · January 2015

We have similar payments and income- mortgage is $1,330 (comes out the first) and our day care averages $1,800/month (due on the 15th). For us, we take $500 every 2 weeks from my checking account and move it to our joint savings ($13,000/year saved). It's an automatic withdrawl that comes out the day after my paycheck goes in. Our general savings account and 1 CD currently cover 9 months of expenses however we do use our savings to fund our Roth IRA accounts and the girls' 529 plans each year. We aren't planning on buying a new car until DD#1 starts kindergarten in September. The day care payments will drop by almost 50% and we'll be able to easily afford a 3 year car payment including DH's trade in (2006 subaru outback). Once DD#2 is out of day care, I'll probably get a new car, but I don't mind keeping my 2003 honda civic.

Sisugal · January 2015

You need to stop using your credit card -- at least until you have it paid off.
KEEP the emergency fund as it is and don't use it.

And no - do not use it when you buy a house either. Start a separate account for your future home.

Car - IF you need to finance it - do NOT finance longer than 3 years. If those payments are too high - you are buying too much car for your budget.

MAKE a budget - and stick to it. (You can start by tracking your current spending and categorizing it - -- it will bring into focus exactly where your money is going. Then comes an honest look at where you need to make changes and how you will do that. Time to PRIORITIZE.)
Is your spending helping you meet your goals and values? If not, why not?

A good book to read is David Bach's Smart Couples Finish Rich -

hoffse · January 2015

Stephanie2167 said:

We have a "budget" that we do not stick to. Obviously. Ugh.

Can I piggyback onto my own post with another question?

@hoffse made me think of something. So say I wanted to put $1500 away to start saving for a minivan. How would you do that? The first two weeks of the month are usually pretty brutal for us. With rent (1600 on the first) and daycare ($1100 for the first two weeks) that leaves us about $1000 to tackle the rest of our bills due during the first two weeks plus groceries, gas and my daughter's ballet class.

Then by the 15th, after another $1100 to daycare, we have $2600 for groceries, gas, cell phones, etc. Would you just automatically have $1500 taken out on the 15th or move that yourself monthly (in case that month you have other bills that come up (We pay our car insurance bi-annually so we get that bill in March and September). Does that make sense?

So this is a large reason why I do use credit cards. It allows me to cash-flow things like grocery more effectively when we happen to run into months where we don't get paid until pretty late. That happened in January, actually.

I generally pay for everything I can at the very end of the month. Our mortgage and a couple student loans are due on the first, but I budget for those from money from the month before, so from a cash-flow perspective it feels like they are being paid at the end of the month too. Then any credit card that closes in January gets paid in January and so forth. So we basically save our income through the month and then allocate it to all the bills and our savings at the very end of the month.

I do keep track of our purchases all month long, but nothing is paid for until the last week for us. It just makes it easier to cash flow things, especially because we usually have some pretty significant employer-reimbursed expenses. We only get reimbursements twice a month. If we were paying cash for everything, I wouldn't be able to keep track of it as well, and there's a chance we would randomly run out of money in the first or second week of the month and then get a huge surplus in the third or fourth week.

I think your savings should come from the money left at the end of the month. But do track your spending all month long so that have a sense of how much you have spent along the way. That's the only way this method works if you are on a budget that feels kind of tight.

You just need to look hard at your cash flow and find a system that works so you don't run out of money part-way through the month. Make a note of when your credit cards close each month, and make a point to pay them in the month they close. I have a card that closes on the 8th and a card that closes on the 22nd. They both get paid at the end of the month, regardless of their due dates. Anything "spent" on those cards gets budgeted into the correct category for that month. What this also means is I am often a month ahead of myself. I've been spending "February money" on one of my cards since January 9th. That's because the card closed on January 8 and will close again on February 8th. All of the purchases made between Jan. 9 and Feb. 8 will be paid for at the end of February. I promise it's not that complicated - just take some time to figure this out, and you will be better equipped to stick to your budget.

Xstatic3333 · January 2015

I also once had CC debt (around $7,000) and an oversized e-fund ($25,000) so I know how you feel. Do it. It is so, so worth it.

Sisugal · January 2015

AprilH81 said:

Sisugal said:

You need to stop using your credit card -- at least until you have it paid off.
KEEP the emergency fund as it is and don't use it.

And no - do not use it when you buy a house either. Start a separate account for your future home.

Car - IF you need to finance it - do NOT finance longer than 3 years. If those payments are too high - you are buying too much car for your budget.

MAKE a budget - and stick to it. (You can start by tracking your current spending and categorizing it - -- it will bring into focus exactly where your money is going. Then comes an honest look at where you need to make changes and how you will do that. Time to PRIORITIZE.)
Is your spending helping you meet your goals and values? If not, why not?

A good book to read is David Bach's Smart Couples Finish Rich -

Their emergency fund is $45,000 dollars. I think they can safely use some to pay of the credit card to save the interest payments and still be okay.

I know - however, they overspend (Christmas), (CC debt)t and are not operating on a pre-planned spending approach. (Besides I am a financially conservative person who believes in and keeps more than 6 months' expenses in an emergency fund, have a paid off mortgage and have no other debt - by practicing what I preach).
The exercise of setting up a spending plan (budget) to pay down the debt will form a better discipline and approach to money management.
The problem is not money or lack of money - the problem is money management.

Stephanie2167 · January 2015

@sisugal - you are absolutely right that "we" (it's mostly me - I shop for the kids) need to stop using our credit card. I should add we have two credit cards. One with no balance and the other with the $5000 balance.

I think I do feel comfortable taking from my e-fund to pay it off. And we have some financial goals for 2015. So that is where my efforts are going. Thanks for your input.

Thanks @cbee817. I have a 2008 Honda Accord that I LOVE and planned to drive until the wheels fell off. But then we had twins and that threw us a curve ball. We're making due with it for now, but are planning to trade in for an Odyssey in the next year.

@hoffse - That makes total sense how you do that. Our credit card bill is due the 18th of the month. I changed the due date to right after payday so that I knew we were able to pay it and not worry about it.

@aprilh81 - Thanks so much for your input. We will sit down this weekend and figure out how to stick to our actual budget.

brij2006 · January 2015

First of all, cut up the credit cards. They're about behavior. It's much easier and hurts less to charge something to a credit card, than to see it automatically being taken out of the balance of your checking account. Which in turn makes it easier to spend more.

Then use the E-fund to finish up the CC debt.

Add up 6 months of your expenses, and that's what should be in the E-fund. Put that into a savings account at a different bank or in a money market, and never touch it unless it's in the event of job loss, roof leak, furnace breaking, etc.

Then start putting aside money each month from your budget for a newer (used) vehicle. I would split your savings into a few different categories though. Car, house, and annual expenses (car insurance, Christmas money, etc). That way you have those saved for monthly, and it doesn't completely throw your budget when those expenses come up.

Sisugal · January 2015

Really, you do not "need" to shop for your beautiful girls. Kids clothing may be found for VERY cheap - consignment, MOM's groups, garage sales etc. They do not need a closet full nor name brands. Instead of shopping for the girls, get out of cc debt and stay out of debt and put more money toward a college fund, future financial stability --as well as bigger $$ expenses, like cars, vacations and a house.

Live on less than you take in ---

vlagrl29 · January 2015

I think it's easy to shop consignment clothes for little girls age 2 and under but it seems there really isn't much out there for older girls - that's what I'm noticing as DD gets older. So I've been shopping for her in the clearance sections, paying attention to sales and coupons at old navy, gap kids, kohl's, and jcpenny

Pay off debt from e-fund?

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