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Message
Paying off debts - Emergency fund necessary?
Posted on 10/4/15 at 11:47 pm
Posted on 10/4/15 at 11:47 pm
I know TD isn't the place to come for serious advice but it seems this area usually is good for some of that from time to time.
My husband and I are buckling down and for the next 2 years or so (hopefully a little less) we are putting every single penny towards debt. We have ourselves on a strict budget and hopefully we can stick to it for the next 24 months. If we do that we should have both our student loans paid off as well as both vehicles, a total of about $100,000 in debt. The mortgage is not our focus as we intend to sell and move to a nicer house not long after getting out of debt.
My concern is having an emergency fund. Everyone says that we should have one first and then begin paying down debt. However, we both have a few credit cards available to us and they ALL have a $0 balance. We only use one for the cash back we get but it is paid in full every month. Between the two of us, I would say we have roughly $20,000 in credit available to us if need be. Is it insane to think of that as our emergency fund? The way I see it, should we need to use the credit cards then we will and we will stop paying debt until credit cards are paid off and then get back on our debt payment plan. I just hate to delay paying down debt to save for an emergency fund when we have the credit available if need be. I just think of the interest being tacked on to all our debt while we are sticking cash in a savings account that isn't making us any money.
What would you do in our situation?
Also, does anyone have experience doing this? We have always done what we wanted, not having kids or anything. It is a huge lifestyle change for us to even cook more than once a week, much less every day but I am hoping we can get used to it. It has been different the first two weeks but I wouldn't say hard. Making that first huge payment on my student loan on Oct 1 was pretty darn nice.
My husband and I are buckling down and for the next 2 years or so (hopefully a little less) we are putting every single penny towards debt. We have ourselves on a strict budget and hopefully we can stick to it for the next 24 months. If we do that we should have both our student loans paid off as well as both vehicles, a total of about $100,000 in debt. The mortgage is not our focus as we intend to sell and move to a nicer house not long after getting out of debt.
My concern is having an emergency fund. Everyone says that we should have one first and then begin paying down debt. However, we both have a few credit cards available to us and they ALL have a $0 balance. We only use one for the cash back we get but it is paid in full every month. Between the two of us, I would say we have roughly $20,000 in credit available to us if need be. Is it insane to think of that as our emergency fund? The way I see it, should we need to use the credit cards then we will and we will stop paying debt until credit cards are paid off and then get back on our debt payment plan. I just hate to delay paying down debt to save for an emergency fund when we have the credit available if need be. I just think of the interest being tacked on to all our debt while we are sticking cash in a savings account that isn't making us any money.
What would you do in our situation?
Also, does anyone have experience doing this? We have always done what we wanted, not having kids or anything. It is a huge lifestyle change for us to even cook more than once a week, much less every day but I am hoping we can get used to it. It has been different the first two weeks but I wouldn't say hard. Making that first huge payment on my student loan on Oct 1 was pretty darn nice.
9
Posted on 10/5/15 at 12:02 am to BigB0882
quote:
The mortgage is not our focus as we intend to sell and move to a nicer house not long after getting out of debt.
So you are working on getting out of debt so you can take on more debt?
Posted on 10/5/15 at 12:08 am to SG_Geaux
We live in a starter house that is by no means where we want to live forever. We have been here 8 years, another 2 will make 10. I left this out but we will probably save for 2 years post-debt to have a very large down payment to keep our mortgage low. Not having a mortgage is not a reality for most people in this country so I don't see how taking on a mortgage is a bad idea, especially if we get into a better house in a better neighborhood with a nice down payment to avoid PMI and keep our monthly note around what it is now. You can think whatever you want about getting a new house after getting out of debt but for us this is non-negotiable. We do NOT want to live in our neighborhood any longer than we have to and will move as soon as we can. Besides, that was never my question so 
This post was edited on 10/5/15 at 12:10 am
Posted on 10/5/15 at 12:34 am to BigB0882
Pay down on high interest debts and ones you may be upside down on. And then debt that may give you a line of credit. We have lines of credit with both business we paid down but keep open. Or pay off assets you can take loans against if need to. Houses etc. I like both. Pay off worst debt first. Highest or debt that has no tax benefit, then pay off that with least tax benefit, then the rest. I could pay off all mine right now, but i'd have to empty many accounts and sell at least one property. Getting there. Just hate to see money go bye bye. Like to have some around for investments. But I've been growing the frick out of it...so, I'm good.
Posted on 10/5/15 at 6:10 am to BigB0882
have an E fund of at least 1k-
If both of your jobs are secure no reason to have a 6 month E fund
If both of your jobs are secure no reason to have a 6 month E fund
Posted on 10/5/15 at 6:16 am to SmackoverHawg
The entire point of getting out of debt is to ensure that during the process you don't take on additional debt. So in that sense, regardless of the amount of available credit you both have, the Emergency Fund equating to one of those cards is entirely counterproductive.
I paid my student loans off on my own before I got married, and my wife and I had about a half dozen revolving trade lines we recently consolidated into a single installment loan through our bank which has saved us several hundred per month.
We have her car note ($295/mo for just less than 3 years) and the installment loan.
Prior to her car and the installment loan, we were paying approximately $900/month on her old car note and several revolving trade lines. Now we pay less than $500 and plan to retire that entire amount prior to her final car note.
I do have to wonder why you decided to buy a home in an area or place you didn't want to invest a significant amount of time in. With rates so low the past few years and set to rise you have missed a golden opportunity it seems. I understand the idea of rewarding yourself with more house but with that comes more furniture and more other things that seems to make me think you'll be in a bit of a debt yo yo. Maybe wrong about it but I've seen it a time or two.
But back to your original point...put cash aside for your Emergency Fund. DO NOT USE CC's. It will be too easy to rely on them otherwise. In fact...why do you have them at all if they are at $0 balance?
I paid my student loans off on my own before I got married, and my wife and I had about a half dozen revolving trade lines we recently consolidated into a single installment loan through our bank which has saved us several hundred per month.
We have her car note ($295/mo for just less than 3 years) and the installment loan.
Prior to her car and the installment loan, we were paying approximately $900/month on her old car note and several revolving trade lines. Now we pay less than $500 and plan to retire that entire amount prior to her final car note.
I do have to wonder why you decided to buy a home in an area or place you didn't want to invest a significant amount of time in. With rates so low the past few years and set to rise you have missed a golden opportunity it seems. I understand the idea of rewarding yourself with more house but with that comes more furniture and more other things that seems to make me think you'll be in a bit of a debt yo yo. Maybe wrong about it but I've seen it a time or two.
But back to your original point...put cash aside for your Emergency Fund. DO NOT USE CC's. It will be too easy to rely on them otherwise. In fact...why do you have them at all if they are at $0 balance?
Posted on 10/5/15 at 7:44 am to BigB0882
I would open a Roth and use that as the emergency fund. Just because you're working hard to pay off your debt doesn't mean you should ignore retirement savings
Posted on 10/5/15 at 9:43 am to BigB0882
If you are trying to pay off $100K of debt (good luck, that's an amazing goal and I hope you hit it) peeling off 1-2K and putting into an emergency fund isn't going to cause that much of a delay in paying off that 100K debt.
I would keep a card at zero and use that as an extended emergency fund in case something really bad happens that costs several thousand. But having some cash at the ready just gives you an added sense of comfort, in my opinion.
I would keep a card at zero and use that as an extended emergency fund in case something really bad happens that costs several thousand. But having some cash at the ready just gives you an added sense of comfort, in my opinion.
Posted on 10/5/15 at 9:53 am to BigB0882
quote:
I just think of the interest being tacked on to all our debt while we are sticking cash in a savings account that isn't making us any money.
The interest you're losing out on is a math problem. You don't have a math problem. You have a priorities problem.
You're right in wanting to pay down your debt as fast as possible but I believe you're going about it in a less-than-effective way. You should save at least 4 months of your monthly expenses first, then attack your non-mortgage debt.
Once you're debt-free besides the house, take the monthly amount y'all were typically paying toward the debt and save that each month until y'all have a total of about 20% downpayment money in addition to your emergency fund. That way y'all can put that downpayment toward the new house and hopefully not put yourselves "backwards" in your mortgage total. Ideally, you would only take out enough mortgage on the new house to "break even" with your old mortgage. That way y'all can continue paying that same amount that y'all had used previously to pay off debt and then save for the downpayment and apply that to the new mortgage. You'd pay off the new mortgage in a surprisingly short period of time.
Y'all don't have a math problem and yes, y'all would lose out on some interest but it won't be nearly enough to make the strategy I just outlined not worth it.
Don't rush into this. If you do, you'll be back in the same boat you're in today with nothing but a newer/bigger house and more debt.
Posted on 10/5/15 at 9:55 am to BigB0882
I guess it just depends on how much of an emergency fund we're talking about. The wife and I used our credit cards as an emergency fund as we were starting out as parents. We never really got in a bind, but we didn't have any real emergencies pop up, or at least expensive emergencies. We also weren't paying down a lot of debt, we just had most of our disposable income going towards everyday expenses. Through all of it, our savings account never got below $1000, so we did have a very small emergency fund.
If you have a timeline of paying off $100k in two years, it sounds as if you guys are doing decent enough professionally. Even if you use the credit cards, you could seemingly pay them back off quickly while just paying minimum on student loans and car loans. So I don't think it's a horrible plan, though it may extend your timeline a bit. Not the end of the world, IMO.
Others here will disagree.
If you have a timeline of paying off $100k in two years, it sounds as if you guys are doing decent enough professionally. Even if you use the credit cards, you could seemingly pay them back off quickly while just paying minimum on student loans and car loans. So I don't think it's a horrible plan, though it may extend your timeline a bit. Not the end of the world, IMO.
Others here will disagree.
Posted on 10/5/15 at 10:03 am to The Spleen
You seem to think about it the way I do. Any emergency that comes up would go on credit card and the next month or two (or however many, depending on cost of emergency) we would put the extra cash toward paying off credit card and pay the minimal amounts on loans.
As for why we are in a house we don't want to be in long term, well, we were young and didn't take our time before buying a house. The neighborhood is fine but it is a cookie cutter neighborhood and as the years have gone by it has filled up with LSU students renting most of the houses. We are in our mid 30s and not interested in living with a bunch of college students. We'd like to have a huge down payment and get a nicer house in a nicer neighborhood but with the same amount of mortgage.
We are both in education so our jobs are very secure, even if something happened we would find work pretty quickly in another school or district nearby. Both of our jobs are high demand as well, very few people to fill our roles.
Thanks for all the advice. I think we will stick to using CC as an emergency fund. However, if either of us begin to rely on CC for other reasons then that will end and we will build an emergency fund instead. I just don't want to delay getting all this debt paid off.
I suppose another option is to save the emergency fund and then at the very end us it to finish paying off our loans if we make it that far without having had to touch it. We would quickly build it back up after having all debt paid off.
As for why we are in a house we don't want to be in long term, well, we were young and didn't take our time before buying a house. The neighborhood is fine but it is a cookie cutter neighborhood and as the years have gone by it has filled up with LSU students renting most of the houses. We are in our mid 30s and not interested in living with a bunch of college students. We'd like to have a huge down payment and get a nicer house in a nicer neighborhood but with the same amount of mortgage.
We are both in education so our jobs are very secure, even if something happened we would find work pretty quickly in another school or district nearby. Both of our jobs are high demand as well, very few people to fill our roles.
Thanks for all the advice. I think we will stick to using CC as an emergency fund. However, if either of us begin to rely on CC for other reasons then that will end and we will build an emergency fund instead. I just don't want to delay getting all this debt paid off.
I suppose another option is to save the emergency fund and then at the very end us it to finish paying off our loans if we make it that far without having had to touch it. We would quickly build it back up after having all debt paid off.
This post was edited on 10/5/15 at 10:07 am
Posted on 10/5/15 at 10:09 am to BigB0882
quote:
. If we do that we should have both our student loans paid off as well as both vehicles,
quote:
We are both in education so our jobs are very secure
Why not Public Service Loan Forgiveness?
If you qualify, paying extra on your student loans may be the worst thing you could do. Under the PSFL program, your loans will be expunged completely after 10 years of service with no tax implications.
That's what I'd be checking first and cross your fingers you qualify.
This post was edited on 10/5/15 at 10:18 am
Posted on 10/5/15 at 10:49 am to Teddy Ruxpin
quote:
Why not Public Service Loan Forgiveness?
That public service loan forgiveness shite is complete and utter bullshite.
In order to qualify, you have to have been paying your student loans for at least 10 years and working as a state or federal employee to qualify. If you've been paying for your student loans for 10 years, you should have found a way to pay them off by then!
Posted on 10/5/15 at 10:59 am to TDsngumbo
quote:
That public service loan forgiveness shite is complete and utter bullshite.
That program may be, but there is another program for educators that has different rules and payouts. OP might want to look into the educator program. You have to teach at a certain kind of school - I forget the term at the moment but it's not the best schools - and if you do it for 5 years, they forgive so much of your loans. Amount depends on the subject you teach.
Posted on 10/5/15 at 11:09 am to TDsngumbo
quote:
working as a state or federal employee to qualify
Incorrect
quote:
If you've been paying for your student loans for 10 years, you should have found a way to pay them off by then!
Wat?
This post was edited on 10/5/15 at 11:10 am
Posted on 10/5/15 at 11:14 am to BigB0882
First of all, congratulations on beginning this attack on your debts. I see nothing wrong with wanting to pay off your current debts and setting a goal for the future, once these debts are paid off: purchasing a new home.
The only issue I see, as other have pointed out, is your reluctance to set up an emergency fund of some sort. Even if it's a Roth (which you could lay hands on, if necessary), that's your money. A credit card or line of credit is not your money and the terms and limits can change, if there happened to be a macro economic shock, which might be the cause of your emergency - think 2008-09. At the very least, set aside *some* cash, even if you want to think of your lines of credit as (supplemental) emergency funds.
Good luck.
The only issue I see, as other have pointed out, is your reluctance to set up an emergency fund of some sort. Even if it's a Roth (which you could lay hands on, if necessary), that's your money. A credit card or line of credit is not your money and the terms and limits can change, if there happened to be a macro economic shock, which might be the cause of your emergency - think 2008-09. At the very least, set aside *some* cash, even if you want to think of your lines of credit as (supplemental) emergency funds.
Good luck.
Posted on 10/5/15 at 11:17 am to Teddy Ruxpin
When I graduated, Sallie Mae told me I had 10 years to pay my loan back. I planned for as such and paid it off in 6. I didn't take out a loan for every little thing and paid for some college on my own. I doubled down on my loan repayment after graduation and paid it off early.
I never deferred. I never missed a payment. I never asked them for any special treatment, even when I went a few months without a job about 4 years ago.
I majored in History and make a shitty salary because of it. If I can do it with my salary, anyone can do it in 10 years or less. Especially with most any other degree out there. No excuses for those who take longer than 10 years to pay off their student loans.
I never deferred. I never missed a payment. I never asked them for any special treatment, even when I went a few months without a job about 4 years ago.
I majored in History and make a shitty salary because of it. If I can do it with my salary, anyone can do it in 10 years or less. Especially with most any other degree out there. No excuses for those who take longer than 10 years to pay off their student loans.
Posted on 10/5/15 at 11:18 am to 756
quote:
If both of your jobs are secure no reason to have a 6 month E fund
No job is that secure, you need a good 3-6 months of living expenses, as quickly as you can have it available. What's wrong with having a reasonable safety net.
Posted on 10/5/15 at 11:18 am to BigB0882
quote:
We are both in education
Dang - I'm in the wrong field if you can set aside 100k in 2 years....
Posted on 10/5/15 at 11:26 am to The Easter Bunny
quote:
I would open a Roth and use that as the emergency fund. Just because you're working hard to pay off your debt doesn't mean you should ignore retirement savings
I have a question about this topic. If I withdraw principal funds from my Roth before the account is more than 5 years old do I pay a 10% penalty?
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