Monday, January 19, 2009

Making the Emergency Fund a Priority

I've mentioned before that we are focussed on getting our debts paid down as quickly as possible. Debt stresses me out, and I feel like until we get out from under it, we will always have a dark cloud hanging over our heads.  However, given the uncertain times we are currently facing, I have decided it would be more prudent to shift our focus to building up our Emergency Fund. Although it doesn't appear that my husband is in any danger of losing his job, it's not a gamble I'm willing to take.  Our debts are all at very low interest rates (even our remaining credit card debt is locked in at 2.9% and 3.9% for the life of the balance), so it's not like we're paying horrendous amounts of interest.  And our tax-free savings account earns 3% interest, so it's pretty comparable.  What it really comes down to is being able to sleep well at night.  Knowing that, if for some unforseen reason, my husband lost his job tomorrow, we wouldn't be homeless in less than a month.  I'm more interested in protecting ourselves than making the credit card company happy.  We will still continue to make slightly more than our minimum payments on all of our debts (minimum payment rounded up to the next $10.00), but then funneling any extra money into the EF.  Our goal is to have 6 months worth of living expenses in savings (which would actually stretch out to a year when combined with Employment Insurance).  It seems like a huge goal, but we're just taking it a month at a time.  Every time we hit another month's worth of savings in our EF will be worthy of a celebration!  Even if it takes us years to reach that goal (which it most likely will), it will be well-worth it.  We will then be able to take the money we were contributing to our EF and throw it at the debt (which will be slowly declining in the meantime).  I know this is contrary to the advice of most financial experts (who usually say debt repayment comes before savings), but I think these are different times we are about to be living in, and we need to protect ourselves.  Creditors are revoking credit lines, so as you pay down balances on your credit card debt, the credit card company is actually reducing your available credit right along with it, eliminating the option of using that credit card in an emergency.  In the past, people would always say that you should pay down your debt, and then you'd have your available credit to use in case of an emergency.  This is no longer the case.  Not to mention I'd rather not be dependent on a credit card company to save my family during a time of crisis, it totally goes against my desire to be as self-sufficient as possible.  I'd rather keep my debts at the low interest rates that we have, and beef up our savings, and then attack the debt with gusto, knowing that we have protected ourselves from financial disaster.  

3 comments:

  1. I read a lot of personal finance blogs, and most of them recommend paying yourself first by building up an emergency fund. I am totally on the same page as you. As much as I want to get out from under all our debt, I would like to have an emergency fund, so if an emergency does arise, I am not taking on more debt to take care of it. Unfortunately I don't have a lot to put towards an emergency fund right now, but every dollar helps, no matter how small the amount may seem. Little by little, it adds up to something!

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  2. Sounds like a good plan. We also built up our emergency fund some before eliminating the debt. Now, we are building up the emergency fund yet a little further. It definitely helps you to feel calm, especially in these times. Good luck!

    Jennifer

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  3. Thanks for your comments, guys!

    Kelly, I feel the same way about not wanting to take on any new debt. I'd rather see the debt go down very, very slowly than put every cent into paying it down, only to find that we've left ourselves short or vulnerable in an emergency situation, and then have to acquire new debt, most likely at a higher interest rate! By protecting ourselves first, we can then pay down the debt quickly without having to worry. I know what you mean about not having much to put toward the EF. We've squeezed our budget until it hurts, and managed to find $50.00/month to contribute to our EF. But even $10.00 would be better than nothing, and in an emergency situation every little bit would help. Any "extra" money could also be thrown at the EF.

    Jennifer, How much did you build your EF up to before tackling your debt?

    I think a big consideration is how long it will take you to pay down your debt. With our budget as tight as it is, debt repayment is going to take many, many years. I'm not willing to be vulnerable for that length of time, especially considering we are a one-income family and will soon have 3 small children. If, on the other hand, I thought we could knock our our debt in less than a year, I might be more willing to take the risk and get the debt out of the way first. But we are probably looking at about 10 years of debt repayment, so that's way too long to go without an EF.

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