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Alrighty, kiddos, here's the deal. I have about 90K in school loans, 8K in credit card debt, and 7K owned on a car worth about 7K. I make 41K a year. I have just succeeded in saving my $1,000 emergency fund by following some of the advice from Dave Ramsey's Total Money Makeover. I'm a reluctant fan of his - he makes sense, and his advice works.

The next step in the Total Money Makeover is to begin paying off my unsecured debt, lowest balance to highest balance. I want to do that, but I also want to save another $1,000. I could use that for new tires on my car, breaks for my car, just basically a special emergency fund for car-related woes. Coincidentally, $1,000 is also the amount of my car insurance deductible, so if I were to get in a wreck, that would cover me without wiping out my entire emergency fund.

Do I forge ahead with Ramsey's plan, and trust that $1,000 is enough? I should point out that I've never had this much cash in a savings account in my adult life. I think it is strange how saving cash grows on you.

flag	asked Dec 19 at 2:51 Dogfood Provider 419●7

Dr Dean · Accepted Answer · 2009-12-21 00:16:08Z UTC

I would make two points that I think are more "technical" but I think will help to clarify the points above.

The emergency fund, is for true emergencies-an emergency car repair, or unexpected illness.

The money for new tires is not emergency fund money, it is part of your "planned spending"-aka the "b"word. So when you do your budget, make a category for car repair and fund it over time to equal the money you will need to spend on the car maintenance. That is not emergency fund number two. You should be doing the same for all your once, or twice/year, or quarterly expenses-such as taxes, insurance premiums, dues, or home association fees. Home maintenance applies as well-if you know you need a new roof or new paint-begin to save for it well in advance. This is precisely what will allow you stay out of your "emergency fund."

As to the amount of your emergency fund-I believe Dave Ramsey has suggested the $1000 number for those who are "gazelle intense" and expect to be debt free in 18 mos or less-the old rice and beans/beans and rice plan.

With your level of student loans-that will be unlikely, unless you can raise your income significantly or get them waived-this can occasionally be done if you work in rural areas and in some fields-such as teachers, nursing. So MBH's suggestion to increase the emergency fund to a greater balance, is a good idea-there is no right number-but I would continue putting extra into the emergency fund till you could live on it for at least 3 mos or so.

For all the yound folks reading-if your expected salary is less than 50,000 bucks a year, DON'T BORROW THIS MUCH MONEY FOR SCHOOL! They expect you to pay it back-you don't want it hanging over you the first twenty years of your career!

The Balanced Spreadsheet · Answer 2 · 2009-12-19 16:24:54Z UTC

Congratulations on saving $1,000! Saving cash does grow on you and it is a lot more fun then seeing your debt grow larger. With that being said I would keep my baby emergency fund at $1,000 and start attacking your car and credit cards debts and try to knock those out within a year. Knocking those out will create more cash flow to start paying down the student loan.

Like Mighty Bargain Hunter said, for car repairs, I would just recommend you budget every month for car repairs that you know you are going to have to take car off. That way each month you are both saving for future expenses as well as paying down your debt. Now obviously if your tires are worn down to the rim or your brakes are shot, then yes, I would go ahead and use your emergency fund to get them fixed.  But I am not going to have an emergency fund for my car repairs and a separate one for other emergencies.

mbhunter · Answer 3 · 2009-12-19 06:58:35Z UTC

First: Great job saving the $1,000 emergency fund.

Second: Excellent question. Good amount of detail to answer immediately.

Short answer: I don't think saving another $1,000 is a bad idea at all now, despite the fact that you could be paying down your debt faster.

A bigger emergency fund buys you time should something bad happen. Doing this will likely cost you more in the long run, because you'll be paying more out in interest charges than you will be earning on your savings.

How long will your $1,000 emergency fund last you should you lose your job? I suspect not that long. The economy is not in great shape. Jobs are less secure than they were last year. Lower credit card balances are still due each month, but if you have cash, you can weather through gaps in income.

Paying down debt is a very good thing, BUT ... once the money is put toward your debt, it's not available for you to use again, except by borrowing it back.

You know of expenses (or expenses that you want to protect against) that are coming down the pipe. Why not save up for them as long as you already know about them?

One last thought: Nothing says you can't do both. Pay your debt down a little faster than just the minimum, and sock away some more for your emergency fund.

Laura · Answer 4 · 2010-01-03 15:49:30Z UTC

You could also work overtime or pickup a side job for a couple of months and apply that money to the emergency fund. That way you can still get out of credit card debt in a year and you can have your bigger emergency fund. The benefit of this is if after you have your extra $1000 and you aren't burned out, keep going for another month or two. That way if an emergency does happen, you don't have to stop your debt reduction to build back up the emergency fund. You can let it get depleted down to $1000. That's what I did and it was very motivating knowing that even if an emergency happens, you will still hit your goal on time. I didn't get discouraged when the emergencies popped up. When I got burned out working extra, I just stopped without feeling guilty.

Kris · Answer 5 · 2010-01-04 11:53:46Z UTC

I get the impression that many people view finances as a psychological and emotional exercise. If you're not keen on a particular task it becomes difficult to do. You know that paying off debt is a priority, but you may feel more security having additional cash around (my wife is the same way).

Why not reward yourself for successfully paying down credit card debt? Start a dedicated car-repair savings account (many people have separate savings accounts for things like this), and then alternate between saving $100 and paying off $1,000 in debt -- or whatever amounts you feel are reasonable. Or if you're going after low balance cards first, maybe you could save $100 more each time you successfully pay off an entire credit card balance.

Really, whatever you think will allow you to prioritize paying down credit cards while rewarding yourself with healthy saving.

(Incidentally, from a risk-management standpoint, I think it is a wonderful idea to have a savings account about the size of your deductible to handle losses and repairs. Great insight on wanting to do that.)

Dogfood Provider · Answer 6 · 2009-12-28 06:03:54Z UTC

I've decided to treat my credit card debt as the only debt I'll be gazelle intense on for now. Until I'm out of that debt, I'm going to keep my emergency fund at $1K. I'm going to increase my monthly budget for car expenses to $50, though, and let that pile up slowly in the meantime. Once I have my credit card debt paid off, I will reconsider things and figure out whether I want to increase my emergency fund or tackle the next level of debt. I babbled about this on my blog a bit, too, here and here.

Emergency Fund in place; Now I’m tempted to save. Should I?

6 Answers