Emergency Fund vs. Credit Card Debt Payment

[jefferson]

Should I start to build up an emergency fund *before* paying off debt?
I have heard it said both ways..

I understand the logic behind it.. I could lose my job at any time (especially in this economy), and an Emergency Fund would potentially allow me to skate through a few months while job hunting..

However, every cent that I put into the E-Fund, is money that ISN'T going towards paying off debt.

Thoughts?

Jefferson

[Jonathan K]

Jefferson,

An E-Fund is essential to ensure financial stability. See this post on more info on getting debt free.

Also check out Dave Ramsey's site about Gazelle Intesnity and the Debt Snowball Strategy in getting out of debt. The idea is to sort your loans smallest to largest. Pay off the smallest first and then apply that payment to the next smallest loan.

So let's say you have 2 debts of $1,000 and $10,000 respectively. Your minimum payments are $50, and $350 respectively. Let's say you adjust your budget and have $450 to go towards paying off debt. What you would do is pay $100 on the smaller debt of $1,000 until it was paid off while making the minimum payments on your $10,000 loan. Then you would apply the $100 and add it to the minimum payment of $350 for a total of $450 a month toward the $10,000 until it was paid off.

A fantastic game to illustrate this to play with your kids, nieces, nephews, or neighbors is Dave Ramsey's "Act Your Wage." Think Monopoly but played to get out of debt instead of get everyone's money. We have it and all the poeple we have played with love it. It teaches great principles to kids of all ages from 10 to 110 (or greater!).

Dave coined the term Gazelle Intensity after reading Proverbs 6:4–5.

Give no sleep to your eyes, nor slumber to your eyelids. Deliver yourself like a gazelle from the hand of the hunter, and like a bird from the hand of the fowler. Proverbs 6:4–5

I understand the logic behind it.. I could lose my job at any time (especially in this economy), and an Emergency Fund would potentially allow me to skate through a few months while job hunting..

Actually an E-Fund isn’t just for the purpose of providing if we lose our jobs. An E-Fund is also for when the car breaks down and need repairs. It is for doctor’s bills, replacement of appliances, and many other things that do happen on a regular basis. An E-Fund is so you DON'T have to use the credit cards in case of an emergency. An E-Fund is just the beginning. The real key to success after an E-Fund is setup is having a budget and controlling your money (spending). Trust me it can be done. My wife and I had over $12,000 in car loan debt alone... We became debt free in less than 3 years!

The Bible also says:

Prepare your work outside and make it ready for yourself in the field; afterwards, then, build your house. Proverbs 24:27

A prudent one foresees the evil and hides himself, but the simple pass on and are punished. Proverbs 22:3

A wise man thinks ahead; a fool doesn’t, and even brags about it! Proverbs 13:16

Owe nothing to anyone except to love one another; for he who loves his neighbor has fulfilled the law. Romans 13:8

[4jacks]

Yes
1) Save $1000 e-fund
2) Pay off debt
3) Save more in e-fund

[HarMoney]

Our best advice would be to split money between your E-fund and credit cards, put a little towards the cards and a little towards your emergency fund. That way you can pay off debt and still have a little saved up.

[4jacks]

I disagree with the method of trying to do two things at the same time. I'm siding with Dave Ramsey, Crown Financial and Suze Orman, all of whom suggest to mentally get in the game and see progress you tackle one task at a time. All also start with a small emergency fund.

[Jonathan K]

I disagree with the method of trying to do two things at the same time. I'm siding with Dave Ramsey, Crown Financial and Suze Orman, all of whom suggest to mentally get in the game and see progress you tackle one task at a time. All also start with a small emergency fund. - 4Jacks

I agree. If you do one thing you can do it well. Two things you can do them mediocre. I'm not familiar with Crown Financial or Suze Orman. However, I can vouch for Dave Ramsey's program. I agree with 4Jacks. However, adding an important step.

1) 1000 in an Emergency Fund. Do this fast!
2) Make a budget & stick to it (When we started this we used the Envelope System)
3) Pay off debt using Snowball Method. See this article by Bob.
4) Save a fully stocked Emergency fund of 3-6 months of expenses

[4jacks]

I'm not familiar with Crown Financial or Suze Orman. However, I can vouch for Dave Ramsey's program.

Crown Financial is the Polite, more Christ Centered version of Dave Ramsey.
Suze Orman is the agnostic, politically correct, liberal version.

They all have just about the same seven steps.

Crown Financial predates Dave Ramsey, however Dave is more popular.

[pochax]

i am most familiar with Dave Ramsey and Suze Orman (i actually was listening to Suze before i "met" Dave on the podcasts). some key highlights/differences:

Suze:
Debt:
Not 100% against use of credit cards as long as you pay the balance off every month (ie. never pay interest)
Pay off the highest interest rate debt first, then snowball down by interest rate (mathematically the best way to pay off debt, ie. saves you the most money in the long run)
advocates in investing in company 401k up to the match, even if in a debt snowball (unless the interest rates are outrageous, like >20-30% APR)

Investing:
seems to encourage high-dividend-yielding stocks and ETFs
okay with investing in individual bonds but not in bond mutual funds
of note: her own personal investments (in the $10s-of-millions) is 90-95% invested in municipal bonds (tax-free yields) and (i think) real estate (which i think she does recommend for VERY HIGH net worth individuals like herself)
college savings: advocates 529 plans for saving for college

Dave:
Debt:
100% against credit cards
seems to be 100% against student loans for education
won't fuss at mortgages where the monthly payment is <25% of monthly takehome pay on a 15yr-fixed-rate mortgage
Debt snowball works by paying off the lowest balance debt first, then snowball up by balance (not mathematically the best way but argument goes behaviorally the best way due to the positive reinforcement of paying debts off faster)
Advocates holding off on investing in 401k EVEN with a company match if still in debt snowball

Investing:
advocates use of stock mutual funds (growth/aggressive growth/growth&income/international growth) and real estate for investing
advocates using 10-yr or greater performance record for basis of choosing mutual funds
against all investing in bonds/bond funds
college savings: favors saving in ESA (Coverdell) over 529 plans

IMO, Suze is more reasonable on credit card (CC) debt, but i understand that for those for whom CC use is dangerous (ie. can't pay off balance monthly), Dave's is probably the way to go.
i agree with Suze on college savings and i am not fond of either Suze or Dave's advice on investing in general.

[ontargetcoach]

In reference to the original question. 1K EM fund is top priority while paying min. on all debt. Jefferson, if you see a real chance that you'll be laid off soon, then keep on saving for a larger Emergency Fund. If you're just scared...then noone is going to yell at you for having a 2K or larger starter Emergency Fund. Just get to paying off your debt as quick as possible. With Tax returns coming soon, good chance that EM fund can be fully funded quick.

[Jonathan K]

Crown Financial is the Polite, more Christ Centered version of Dave Ramsey.
Suze Orman is the agnostic, politically correct, liberal version.

They all have just about the same seven steps.

Crown Financial predates Dave Ramsey, however Dave is more popular. - 4Jacks

Thanks 4Jacks for the info.

Thanks pochax for clarification on debt & investment stands by Dave & Suze.

Jefferson - I still maintain my original position E-fund first, then the debt.

With Tax returns coming soon, good chance that EM fund can be fully funded quick. - ontargetcoach

So true! We used ours to increase our savings, give some towards charity, and help out some friends.

God bless!