Putting the Brakes On Debt Repayment to Rebuild the Emergency Fund
photo by Faeryan
Regardless of which side of the fence you sit on when it comes to how to implement a debt snowball, there is one thing we can all agree on–it is highly motivating to see debt balances falling. So much so that when you have to put the snowball on ice it can be a bit demoralizing.
Murphy Has Set Up Shop at Our House
Over the weekend I mentioned all the things that have gone wrong over the past few weeks, and the various hits to our emergency fund. Fortunately, the emergency fund was there to cover these expenses so we didn’t have to turn to credit cards, or try to cash flow them by completely rearranging our budget. Unfortunately, we will now have to put debt repayment on the back burner while we rebuild our emergency fund. I’m just not comfortable living with a reduced emergency fund and throwing every extra penny at debt. With a reduced emergency fund the next rash of emergencies could deplete our savings entirely and force us to once again turn to credit cards.
Here are some of the steps we’ll use over the next few weeks to get the emergency fund back up to our $3,000 goal:
- Pay only minimum payments on credit cards. Instead of piling anything extra on debt, we’ll be diverting it to savings in the short term. After attacking debt so aggressively the last few months this will prove difficult.
- Snowflake any extra money into savings rather than towards debt. I normally take any found money (snowflakes) and apply them directly to the debt snowball as they are received to boost the amount going towards debt repayment each month. Now, I’ll pile up those snowflakes in savings.
- When the emergency fund balance reaches $3,000 we will turn our attention back to our debt reduction plan. I’m not sure how long it will take to get the emergency fund back to a fully funded status. Thankfully, we didn’t have to dip too far, and I have a couple payments due for some freelance writing work I’ve completed recently–that should help.
Flipping the Switch
I believe this exercise is actually good for us (not that I want more visits from Murphy). When we are finally debt free we will need to flip the mental switch to savings rather than debt repayment, without increasing our spending. Sure, we might add back a few small expenses that we’ve eliminated to become debt free, but for the most part our budget won’t change much. Shifting from debt paying to savings mode and back again should help us get comfortable with both styles of living on less than we make.
Apparently I read this blog earlier than most!
Anyway, I completely agree with that strategy FrugalDad. It is best to have the emergency fund full and waiting rather than trying to attack debt at full force. You will be able to go back to debt reduction soon enough. Living frugally isn’t just about having no debt (or paying off debt), it’s about maintaining priorities and practicing patience.
I definitely think it is a good idea to rebuild the emergency fund first, especially in today’s sagging economy.
How many months does the $3000 emergency fund cover? We have built an emergency fund that will cover all expenses for 7 months. It used to be 3 months but then I was injured and out of work for 3 months.
Where do you draw the line at saving and shift to debt reduction?
I understand why you are doing this. An emergency fund is better to have than an empty credit card because you can use the cash on anything. Sometimes a credit card sucks because you cannot get cash and only can make formal payments. So in that area I support you.
But why not continue to make even a little bit of a reduction on your credit card (like $20/month) so you are paying less interest and have more money in the long term to put into your emergency fund.
Also maybe you should build up a bigger emergency fund now, so in the future you don’t have to keep switching. You can just have it and let it earn it’s own money and never have to top it up. Just an idea.
I think this is great that you are doing this. I do believe, however that it is more important to get some of your debt off of the books. In the long run this will be more beneficial because you won’t have to pay interest that is accrued on your credit card which actually saves you money.
Best wishes!
I don’t believe that paying debt at the same time as trying to rebuild the emergency fund would save all that much money. Besides, an emergency fund is just that — for emergencies. Who knows when another emergency will happen, so it is best to have it available as soon as possible. I’m sure that if FD made more money he would put money towards both goals but for now he’s just doing what he thinks is best for his family with the income he has available. I would do exactly the same thing. (At least FD is not piling up more debt.)
Perhaps someone would like to give him a couple thousand to rejuvenate his emergency fund? Anyone?
I think you’re doing the right thing. Hopefully, it won’t take you long to get your E fund built back up! And hopefully, you won’t have to tap it again for a long time.
I’m not sure how low our emergency fund would have to get before we changed our savings goals around. Probably, we’d start building it back up ASAP and put a hold on other savings.
I agree with FrugalDad’s approach. Even if it were possible to free up space on a credit card instead and save a few bucks in interest, having an emergency fund creates a big psychological sense of security. That’s worth something too.
Nice plan you never know when life will hit your e-fund up again.
I like the intensity that is the key to making the whole plan work.
I am a little interested in the $3,000 number as its more than the $1,000 that is generally accepted. Are you jobs/finances more variable than ‘normal’?
@Happy Rock, I think $1000 is considered the basic, rock-bottom fund. 3-6 months of living expenses is suggested to offset job hunting.
I think $3000 sounds like a good idea if FD wants to be protected against multiple emergencies or one doozy, e.g. replacing the furnace because of an unexpected problem (which is an emergency…vs. it just wearing out but you knew it was coming).
[...] Frugal Dad - Rebuilding The Emergency Fund [...]
FD? Great idea . . . but maybe you could still send a teeny amount to your debt? Even $5 a month is better than nothing!
Good luck!
Hmm, I’ve been reading lots of PF blogs for quite awhile now and I don’t recall seeing this process written out like this. Thank you. I was wondering what I was going to do, now that I have to replenish some of the $3K emergency savings that I had. I hadn’t thought about lowering my debt payments to get the emergency fund back up. Sometimes you just need somebody to make it real clear before ya get it.
Thanks
You are in the minority of people who have an emergency account and should be commended. I have lot’s of friends that I talk about an emergency account, and they just laugh at me. I can’t believe so many people just live paycheck to paycheck without putting some money aside. I tell people to set aside $1k, but your $3k is probably more realistic for the unknown expenses in life. Great job!
I agree with your Emergency Fund plan, but I’m surprised that more people haven’t disagreed with it. So many of the articles I read say that debt reduction is more important than anything. But like your other readers have stated, you really ought to have the emergency fund, because credit cards just don’t make sense if/when an emergency happens. Another angle: Older people (like myself) probably should expand the emergency fund to include “retirement” (whatever that means). It doesn’t make sense for people to spend their entire life paying off debts, and then end up with nothing left.
Several of you have asked why I don’t continue to pay extra on debt. I do make the minimum payments to stay current, but temporarily suspend the extra payments until our emergency fund balance is back up to our goal. Over the life of my debts I’m probably paying a little more in interest, but I’m gaining peace of mind.
Your last comment said exactly what I was thinking. You are Buying Peace of Mind… It’s costing you the difference between the interest you would be paying off, and the interest you earn in the emg. fund.
Me? I would just keep at the debt, betting that another string of bad luck didn’t happen before I got something else paid off, in which case I would be ahead if I kept on paying on the debt.
But I understand being able to sleep at night also - and for some that means having the emergency fund in place, and the resulting peace of mind. There’s all kinds of ways to reduce the debt, and each person has to pick their own path and make their peace with it.
My fiance and I consider our emergency fund to be an amount of money that will cover the most expensive thing that could break on us: Our furnace or air conditioner. That potentially being 3500 dollars (estimate) we try to keep that much available.
On top of that, we are somewhat doomsdayists. If both of us should happen to get laid off in the same day from our respective jobs, we plan on going out and getting temporary jobs as servers, bartenders, or even fast food until we can figure out career options. We figure jobs like these will pay all of our living expenses EXCEPT the mortage payment which is just over 1100 a month! This being the case, we also have enough of an emergency fund to cover our mortage payment for 6 months should we need that long to get another well-paying, steady career.
So, we are a little bit overboard, but we have 10,000 dollars in our emergency fund. That way if our furnace breaks in the dead of winter and we both get laid off, we are good for 6 months. Some days I would die to take a huge chunk of that out and pay off some student loans or my truck loan…maybe even buy a hot tub…but we are both to nervous about the economy to do that.
i just did the opposite…i hit our mini goal of $1500 in emergency fund so I’m putting that on hold to do a debt snowball
Maybe I missed an earlier post, but I wanted to ask you how much you advise for fully-funded emergency fund? One month of expenses?
@natalie - General guidelines tends to be 3-6 month of expenses. One month is not enough. The emergency fund should be able to carry you through job loss or disability.
Personally I have about 6 months.
Re: retirement vs emergency funds.. I actually no longer have a dedicated emergency fund as I will just pull out of my retirement fund if the need arises - at this stage of my life (in my 50’s) I figure the two accounts do not need to be separate. I do keep a money market checking account for very ‘liquid’ easily available monies at about $3000-$4000. And some of my investments are very liquid - meaning 24 hrs or less. I figure that will handle what ever comes up.