To EF, or not to EF?

[Nutria]

The scenario is heavy CC debt, where the person/family has realized the error of their ways, and is now living within their means.

They can set aside $1,000 for something that might happen (an emergency), or use the money to thwart something that is guaranteed to happen (accrual of $100, $200, even $300 of interest).

If the emergency does happen, then charge it.

[disneysteve]

Emergencies WILL happen. I don't consider that a "might" scenario. Cars will need repairs. Doctor visits will happen. Things at home will break. Unexpected expenses will pop up. That's why you need to have at least some money set aside for when those things happen so that you don't turn to 29.9% debt to deal with them.

It's also a mindset thing. If the plan to cover unexpected stuff is credit cards, they haven't fully learned the "error of their ways".

Does it need to be $1,000? We can debate that number, and we have. Most feel it isn't enough.

Ultimately, the answer is that things aren't black and white. Let's say they've got $500/month to work with. They can put it all toward debt. They can put it all toward building an EF. Or they can do a little of each. Maybe put $400 toward debt and $100 toward the EF until they get to about $1,000. Then put all $500 toward the debt.

[DaveInPgh]

How much CC debt and at what interest rate?

I personally would focus on paying off high interest CC debt before I would ever consider starting an EF.

[disneysteve]

I personally would focus on paying off high interest CC debt before I would ever consider starting an EF.

So you would be comfortable walking around with absolutely no money, putting every spare dollar toward the CCs? There's no way I could live like that. I'd want some kind of surplus so that I wasn't racking up new debt every time anything happened.

[bjl584]

This issue has been brought up countless times.

I'd do a little of both. It doesn't have to be all one or the other. I'd feel more comfortable saving at least something and paying down debt. If you put it all toward debt and something happens, you don't have any cash to pay for it. You are forced to use the credit card and you will end up right back where you started.

[DaveInPgh]

So you would be comfortable walking around with absolutely no money, putting every spare dollar toward the CCs? There's no way I could live like that. I'd want some kind of surplus so that I wasn't racking up new debt every time anything happened.

If the interest rate is high, absolutely.

[scfr]

Kill 2 birds with 1 stone. Put money towards the CC debt, then calculate the monthly interest savings from the reduced debt and put those savings in to the EF.

[Nutria]

So you would be comfortable walking around with absolutely no money, putting every spare dollar toward the CCs? There's no way I could live like that. I'd want some kind of surplus so that I wasn't racking up new debt every time anything happened.

Comfortable? No.

But, for example, a 29.99% card with a $15,000 balance coumpounds $4,500 per year. Killing that should be a very high priority.

[disneysteve]

Comfortable? No.

But, for example, a 29.99% card with a $15,000 balance coumpounds $4,500 per year. Killing that should be a very high priority.

It should definitely be a priority, but so should altering your behavior to keep it from ever happening again. Getting in the habit that no matter what happens, you always need to be saving is a big part of that, even if it's just $10 or $20 per week. Save something so that if you get a flat tire, break your glasses, lose a filling from a tooth, or a light bulb goes out, you don't need to resort to debt to cover the cost.

Plus you/they should be working their butts off and slashing their spending to the bone to boost income and minimize expenses until that debt is gone.

[tripods68]

The scenario is heavy CC debt, where the person/family has realized the error of their ways, and is now living within their means.

They can set aside $1,000 for something that might happen (an emergency), or use the money to thwart something that is guaranteed to happen (accrual of $100, $200, even $300 of interest).

If the emergency does happen, then charge it.

I agree with Disneysteve.


The point of having an EF is to avoid new debt. Emergency will happen, sometimes it happens at the worst time.


You don't have to set aside $1000 for EF as DR would suggest (we know you are not a DR fan). You can make this number MUCH higher depending on your financial situations. If you are uncomfortable with $1000, determine what is your "comfort zone" in dollars. Is it $3000, or $5000 instead? If $3000 is what you are comfortable with, make this your EF instead. It might take you several months to save $3000 but you are prepared and ready while paying off your heavy CC debt. The point being is for you to stop charging and incurring new debt. That's why we have EF.

[Nutria]

You don't have to set aside $1000 for EF as DR would suggest (we know you are not a DR fan). You can make this number MUCH higher depending on your financial situations. If you are uncomfortable with $1000, determine what is your "comfort zone" in dollars. Is it $3000, or $5000 instead? If $3000 is what you are comfortable with, make this your EF instead. It might take you several months to save $3000 but you are prepared and ready while paying off your heavy CC debt. The point being is for you to stop charging and incurring new debt. That's why we have EF.

That means even more debt accruing more debt more quickly at an exorbitant interest rate through the miracle of compounding.

(Now that I'm CC debt free, I have much more than a $5K EF.)

[disneysteve]

That means even more debt accruing more debt more quickly at an exorbitant interest rate through the miracle of compounding.

I agree. Until the debt is gone, $500-$1,000 should suffice. But I wouldn't go with $0 under any circumstances.

[tripods68]

That means even more debt accruing more debt more quickly at an exorbitant interest rate through the miracle of compounding.

(Now that I'm CC debt free, I have much more than a $5K EF.)

That's good you are CC debt free.


The question with regards to the debt compounding interest. How much more interest cost you are paying more versus how much you can save aside to reach the target EF amount so you won't have to charge new debt? What's important to you? Is it $50, or $200 in extra interest cost. But that's the stupid tax people pays for incurring debt in the first place. Nobody said, paying off debt would be easy and painless decision when you don't have enough EF set aside.

[ESMonitor]

Emergencies WILL happen. I don't consider that a "might" scenario. Cars will need repairs. Doctor visits will happen. Things at home will break. Unexpected expenses will pop up.

I'd like to expand on this, if possible. What constitutes "an emergeny?" that would qualify as a withdrawl from the EF?

I am sure this has been discussed before. The scenarios i can think of are -

Loss of job, medical payments, lawsuit, funeral bill, costly mechanic bill, natural disaster, fire, car wreck or theft. If you have an appliance that breaks down and has to be fixed and/or replaced, is that an emergency? Fridge, I would say yes, dishwasher maybe not.

I suppose there are emergency scenarios that could happen you wouldn't normally expect. I would assume insurance companies have a long list of these.

[disneysteve]

I'd like to expand on this, if possible. What constitutes "an emergeny?" that would qualify as a withdrawl from the EF?

I think the answer partly depends on your situation.

For my wife and I, very little constitutes an emergency. Job loss is the main thing. Pretty much everything else we can cover out of current income and the surplus in our checking account.

For someone who essentially has nothing, no savings at all, living completely paycheck to paycheck, virtually anything can create an emergency where there is a bill that needs to be paid and no money to pay it. You get a flat tire on the way home from work and need to have it fixed. The lock on your front door breaks. Your kid falls playing soccer and needs an x-ray. Your uncle dies and you need to take a day off unpaid to attend the funeral.

When you are living with no safety net (i.e. Emergency Fund), there are a lot more things that constitute emergencies. That's why no matter how much debt you have or how high the interest rate is, you need to build up some kind of surplus to cover life's every day expenses.