emergency savings vs. debt
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Anonymous
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We have sufficient emergency savings (IMO). A couple of questions.
1) is it typical to use “emergency savings” sitting as cash flow in my checking account? For example we have $8k in this “fund,” but due to cash flow ..its low point last year was 4k. Its high point 17k. 2)We maintain the $8k in this emergency fund but wish it were $20k (about 3x our monthly spending) However, we prioritize aggressive debt payment on big student loans. We consistently put $3k of our monthly income for debt. My job is uncertain and it’s like a bonus. We don’t rely on it. But my spouse's is stable and makes the vast majority of it. We don't want excess cash. Yes, maintainig a better fund, say $20k, would make sense to me. But *building* it? No, it doesn’t make sense to us use time that way. Our debt delays our retirement saving. We have some but it’s behind where you all would think it appropriate. It’s like a. Sufficient for emergency. Job loss would only occur in a Great Depression. There is always a job opening for dh’s job in any city. We feel this step is done. b. Aggressively working on student loans. 4 of them. 4.5-6.8%. Especially the big balance one is the high interest. —Steps c and d together— c. Then adding to retirement, again, aggressively to make up for time. d. Along with step 3, increasing our emergency fund. |
Anonymous
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I’m so sorry, I wrote this poorly. I was trying to get this out quick since I work from home, and kids are home. It’s crazy and was trying to get our basic info out there.
Oops, it needed editing. And I didn’t have time. Thanks. |
Anonymous
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Op here again?
Or would you split the $3k monthly a. Put 1/3 in emergency fund (until what number?) b. Put 1/3 in debt? c. Put 1/3 in retirement? I understand this way of doing things, but I feel this also delays our debt payoff from 3 years for.. what? 7 more years? In the meantime we’re only able to be so aggressive because we’re not doing d. Travel fund I can wait 2-3 years to postpone fun. I can’t wait 7 years to postpone travel. We have young elementary kids. Would they be in 9th grade before we take them anywhere? |
Anonymous
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If you are saying your monthly spending is about 7k per month then 4-8k is no kind of emergency savings. I get that you think DH can always find a job but what if he gets hit by a bus?
You need to put away 3-6 months of spending in an account you consider untouchable, IMO. You can get 5% in a money market right now so you wouldn't be gaining a significant advantage paying down debt. |
Anonymous
| Another note, our fairly low mortgage is of no concern. Riding that out the 27 more years, not aggressively working on that. But also could reconsider it in several years when our situation is different. |
Anonymous
Op here, I think your suggestion is ideal. He has great coverage for life and disability. I do for life, not for disability. The amount of time is takes to put together 3+ months would be 5 months or so? It’s a question of time vs. debt vs. emergency fund. The time lost makes the student debt grow, etc. and delays the end. |
Anonymous
Oh this also goes to my question of cash flow vs. emergency fund. What is your (all of you all) cash flow number? What do you keep in your account? 1 month’s worth I feel comfortable with because then the ordering doesn’t matter for bills/payments/income. So I’d need 7k in cash. 20-21k in emergency. That would take us 7 months to build… |
Anonymous
| I’d get my emergency savings up to six months and I would only pay down college debt if the interest rate is high. If it’s high I’d pay it down to clear the board so you can then focus on retirement. What is good is that you are really thinking this through as it’s not easy. |
Anonymous
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Please excuse my terrible writing. I feel a bunch of what I responded with isn’t clear. Back in a couple of hours anyway.
Hopefully you can see my questions clearly. This isn’t a typical question. I feel like 5 areas are pushing against each other, and people will want to respond with an ideal that is too hard. The 5 areas: Cash flow Emergency (in another fund outside of checking?) *whereas we are overlapping our cash and emergency so they’re being efficient as possible Debt Retirement And last, the postponement or attainment of more fun, which can’t be out off for more than 5 years. |
Anonymous
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If your jobs are stable enough, I’d pour everything into the student loans to wipe them out. How much is there now?
If there’s a chance one of you might lose your job, I’d prioritize the emergency fund. |
Anonymous
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It is hard to answer your questions without knowing your HHI and budget. It sounds like you have just enough to cover bills and then you have an extra 3k (sometimes?) per month that you put into savings or debt? But if you don't have that extra 3k a month does that mean you are only paying minimum on debt and not saving anything? And is retirement being taken out of paychecks? It's not clear.
I do think you are over thinking cash flow VS emergency savings. You could try 5 months of emergency savings in a money market plus one month of cash flow in checking account. Do not touch the emergency fund unless it's a true emergency. |
Anonymous
Can you clarify what you mean by this? And maybe also put some real numbers to your situation? It’s all theoretical at this point, and realistically there’s no real right or wrong answer. Generally speaking, keeping extra emergency fund money in your checking account isn’t a big deal, and where it’s parked is the least of your concerns. How much debt do you have? When will it be paid off at your current rate? If one of your employers offers retirement matching, you should take advantage of that. I think most people will do some fun if they can. I’d prioritize spending money to visit family, but that’s just me. Maybe a once in a lifetime trip to Disney while the kids are small. But if you’re loaded down with student debt, you shouldn’t be spending $10k on a week at the beach over the summer. |
Anonymous
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your emegency fund is NOT cash flow and should not be in your checking account.
the emergency fund should be in a high interest account, some banks are around 5% or higher right now. You need money accruing as it sits somewhere. if it feels right to you and your budget you can use whatever interest accrues monthly towards a travel budget or extra towards debt. you would essentially siphon off what you made in interest every x months if that works for you and is easier to visualize/rationalize. my issue with using funds towards student loans is if they are lower interest loans, then wouldnt you want to run the numbers based on investing for retirement now vs paying off the loans faster? at the end of the short-term and long-term which one makes you have more money and/or which one is more important- your short-term or long-term financial goals? For many of us with competiting priorities, the short-term and long-term can be dissimilar and you need to figure out 1) what is your risk is weighing either more importantly 2)is the benefit >risk of prioritizing one more than the other do either of you have pensions? do you both have stable jobs? what is your debt profile- is it all studnet loans and mortgage or other debt? |
Anonymous
| Don’t wait for ideal finances to start traveling with your kids. You’ll never get that time back. It sounds like you’re conscious of budgeting that you’ll continue to work that out over time. |
Anonymous
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I personally think you are taking the wrong approach. You are paying down 4-6% rate on debt and losing out of 15% in the stock market for retirement plus compounding growth.
Pay as little debt as possible. |