Emergency fund or debt reduction?

geekinaseat

Hi Guys and Girls,

There seem to be two schools of thought when it comes to paying off debts, i.e. building up an emergency fund vs using all of your available cash on paying down your debts straight away, the argument goes something like this:

Emergency fund: Building this up for a few months before you start paying down your debts puts you in the mindset of someone who will not use debt any more -ever. Unexpected costs come out of your EF rather than re-spending on credit cards or taking out new loans. Building up debt again is a line that will not be crossed. Yes, it costs more in the long run but it breaks the borrow-spend mentality and starts the save-spend mentality even before you have actually paid back your debts and leaving you with a healthy outlook and a bit of a lump sum when you finally get to your debt free day. This is Dave Ramsay's (and a few others on the net) preference.

Debt reduction: This is the cheapest and most efficient way of reducing your debt and becoming debt free. The argument goes that once you begin paying off your cards or overdrafts that they become your emergency fund, yes and unexpected cost will set you back again but at least you didn't pay interest on it before it happened. Overall you pay less interest and get debt free earlier. From his article I gather that this is Martin's preference.

I wondered what you all think? And if it's an emergency fund, how much do you think is suitable/realistic? Some people seem to suggest that 6 months living expenses are needed to cover you if you lose your job but it would take me years to save that!

Interested in your thoughts.

Sparklyfairy

Emergency fund. Up to a limit of say £600-£1,000. After that, throw all spare money at the debt.

Googlewhacker

if you have a clear credit card of about 500 quid then I would throw all money at the debt and if something comes along you have the credit card to bail you out and then if you use it you concentrate on paying that cc of incase you need it again

mustang1

Ooooh - good thread. I have £5,500 in debt - £3,500 on 0% CC until December and £1,800 loan.

I am aiming to pay off the loan by August but am tempted to pay minimum payments on the 0% card and build up a few thousand in emergency fund before hitting the cc debt hard. I have NO savings at all so would be in real trouble if anything happened. I live month to month and it's not a nice place to be in.

backinbusiness

I went with the emergency fund and paying debts off at the same time.

When you adopt the MSE way of life, I think it's inspiring to see savings (albeit small) starting to build up straight away. The reassurance and security of having something to fall back on is immense.

Whilst I see the above poster's point - credit card companies can and do reduce card limits at will, and if you are relying on that £500 buffer and they suddenly reduce your limit to £100 - you're back in trouble.

Having savings for me went with the light bulb realisation that putting something on a credit card is not free money, but quite the opposite.

I'd aim for £500; then throw everything at the debt - once that's gone you'll see your saving mount up so quickly! All that money previously thrown away on interest, charges, etc - why do we do it?

Best of luck OP.

BiB

positivelypurple

I agree with a PP that said a bit of both, saving to the emergency fund and paying down debt. My suggestion would be a little emergency fund of say £500-£800 that would deal with minor emergencies. Then pay down debt as quickly and efficiently as possible (i.e. snowballing). Then work on big emergency fund, which would be 6 months, or more, of living expenses.

mrsb83_2

I think OP is confusing a small emergency fund with having savings.

The 6 month living expenses figure is usually a savings goal for those who are unsecured debt-free, perhaps before moving on to paying off a mortgage or making investments.

An emergency fund is what it says on the tin - for things like a blown up washing machine or having to take a trip to see a dying relative etc. I don't have one - I budget and set aside money for car and household repairs (including unplanned ones), and would use my CCs in the case of a genuine emergency.