This past year our family experienced more medical expenses than planned. As you may know, that’s life and not something you can always plan for in your budget. Nevertheless, we made it through the year just fine. I was thankful we didn’t end up accumulating any credit card debt. I know that’s not the case for everyone. You or someone you may know could be overburdened with a lot of medical debt right now.
Should You Use Your Emergency Savings for Debt?
Sometimes people accumulate debt and the answer to paying it off is closer to home than you think. I know the common answers to paying off debt are to work extra jobs, make sure you have a debt payment plan, and of course, use a budget. But sometimes people have done a great job of saving money and hesitate to pay off debt using their emergency savings account. After all, it requires hard work and diligence to save money, and it’s not always easy to let it go.
What Would Dave Ramsey Do?
I recently came across a story from a Dave Ramsey show listener. This person had $7,000 in savings and had accumulated $2,500 in medical debt. He wasn’t sure if he should pay the debt off with his savings. Dave told this person he should go ahead and write the check to pay off his debt. I’m sure Dave knew this person could save the money again.
Certainly, this person knew how to save to begin with, otherwise, he wouldn’t have saved up $7,000! The amount of debt compared to the savings also allowed for a healthy amount to remain in savings to cover his family for an emergency ($4,500 after the debt). I’m sure this played into Dave’s advice as well.
What if You Won’t Have Any Savings Left?
So, in this case it made sense to pay off the medical debt. But what about when paying off your medical debt would leave you with very little, or nothing in savings? My feeling is that a family should always have something in savings to cover the unexpected. I know with our family this usually occurs every other month! I don’t think it would be wise to pay off $2,500 of medical debt and not have a penny left. There is a good chance you could end up in credit card debt should the car break down or some other unforeseen expense occur.
But in general, I like the idea of letting some savings go as long as there is enough money left in the account to protect you from common emergencies. For most people, I think this could be around $1,000. Obviously, this doesn’t cover major emergencies, but it covers most of the unexpected expenses such as minor car and house repairs.
Don’t Forget to Rebuild Your Savings!
All this being said, once the debt is paid, you have to again be diligent about building your savings back up. This could still require some extra work freelancing or doing some other side jobs to earn money. But being willing to let go of your emergency savings to cover medical debt (or any other debt) can help relieve a lot of financial stress. Personally, I’d rather be sacrificing to save then sacrificing to pay off debt!
Have you ever encountered a situation like this (medical or other) when you questioned whether or not you should use your emergency savings to pay off debt? Please share your thoughts in the comments!
{ 9 comments… read them below or add one }
My wife and I are in a situation like this right now. We have an electric bill that, due to extenuating circumstances, is in the neighborhood of $2400. We want to get this paid off, and the Lord provided the bulk of the funds needed to do so through a friend (who we didn’t ask, but says she felt the Lord compel her to share–we are so blessed) — $2000. We have almost no savings right now because of our job situations–we are both part-time–in spite of cutting almost every corner to attempt to build one, other than this cash and $1000 that we have spent time putting aside in the hopes of building up a house and emergency fund for the future.
Our Dilemma is this: it’s obvious that the “extra” cash given to us by our friend was a very timely delivery and blessing to us, so we want to put that towards the bill, and the total bill is only a tad more than the “extra” cash that we have recieved. We want to go ahead and pay this bill off because we feel like it’s “haunting” us, and a cause for worry because of some details surrounding it. In doing so, though, we’ll have only $600 in our savings with little overhead to devote to building it back up at this time.
We’ve been truly blessed with no health issues or emergencies of any sort while we have been working through our current job situation, but realize that it’s also unwise to leave ourselves with nothing. Still, we’re praying through this and hoping in God, who has provided everything that we own or have ever needed in our marriage. Tough stuff, but the test of faith is also a good thing for us at this time.
Maybe things have changed, so check my facts. Medical debt may be paid off with no interest charges. So, come up with a payment plan with the health care providers and make the payments. Don’t forget to ask for any discounts. It is almost a given that any bill without medical insurance gets 40% off for paying in full. My experience with insurance is that insurance pays ten cents on the dollar. To my way of thinking, the discount could be greater than 40%. I had a $104,000 bill for just the operating room. The insurance paid $8,000. I had a $250 for hospital admittance and was told that if I paid the same day, the charge would be $200. MRI at the hospital was $2,600. Same MRI at a store front MRI was $600. I’m going to guess that those that go to the store front all pay up front or they don’t get any service. By law, hospitals have to provide so many services even it no body can pay. They have to make up the difference. Read the 9/2012 Reader’s Digest about how hospital bills come about.
I am looking to have some major repairs done to my house, some windows, new roof, etc… looking to spend about $12k… I have that saved up. By the time I start the project (April) I will have enough in my bank to spend the $12k and leave $1000-1500 in my savings…
Question: Do I do a 401k loan, do I just basically wipe out my savings, do I do a split between savings and 401k?? Any help would be greatly appreciated…
Brian, if I was in your situation, I would try to do repairs in stages, so as not to wipe out your savings. I wouldn’t get a loan if you can help it, it just makes you indebted, creates stress, and pay interest. That monthly payment is more difficult if you suddenly have an emergency. Don’t really know your situation, but if you can live w/o doing some repairs, and keep saving for them, that’s the ticket. But that’s just me… and what I’ve learned from reading Dave Ramsey’s “Total Money Makeover” book. I believe t’s important to keep at least 3 – 6 months’ wages for emergencies. It’s difficult, but well worth it! Highly recommend reading the book.
Brian, I would not touch the 401k at all. If you withdraw it (Most 401k plans let you make hardship withdrawals) there will be tax implications as well as a penalty. If you borrow against it you will need to pay it back, typically out of your paycheck. Worse, should you change jobs you;ll have to pay it all back or suffer taxes and penalties. I also would take a minimal amount from my emergency savings. In your case what I would do is partially fund the renovations from my savings and take a second loan out against the house to fund the improvements. Although I don’t like increasing my debt load the loan against the house will at the very least carry a much lower interest rate then other loan options and provide a tax break on the interest paid.
Yes, Joe is right above. When I receive a medical bill, I call and set up a payment plan. The medical office’s are very used to this and will not hassle you. The medical office can not charge me interest or take me to collections as long as I pay according to the payment plan. Make sure and always write down the person you spoke to when setting up the payment plan and date and time. Keep good records of your payments too. Currently, I have about four different medical bills I’m paying on. Each one is due a certain day of the month. I call on or before the due date and make my payment over the phone via my debit card. We only use the credit cards if absolutely necessary. See posts on my blog about insurance and other tips.
I agree. If paying off all of the debt leaves you pennielss, then that’s no good. Gotta leave some money in the emergency fund!
Jason, I totally agree with your last two sentences. If we’re talking about consumer debt, I think it makes sense to pay it off now and then work hard to replenish the emergency fund.
I believe if we practise what he preach then we should pay off the debt if you have the money
imagine the person knowing you had money and did not pay the debt , ( not a good christain example)
ISNT THERE A VERSE SAYING DO UNTO OTHERS AS YOU HAVE THEM DO UNTO YOU , OR PUT OTHERES FIRST .