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Originally Posted by disneysteve
Not to argue, but just to offer an alternative point of view, many people feel just the opposite. When you are in debt is when it is most important to have a good EF. Otherwise, when an emergency arises, you are more likely to take on additional debt. What good is working on paying down your credit cards, for example, if as soon as an unexpected expense comes along, the only means you have to cover it is to charge it to your CC?
You mention health, disability and life insurance, all very good things to have. But what if you lose your job? How will you support yourself without an adequate EF? When I was jobless a few years ago, we lived just fine on our savings (and a little ebay income). If not for that EF, we either would have been forced to liquidate investments or rack up new debt to cover living expenses for 3 months.
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True, with a small emergency fund, if a BIG emergency happened I'd have to go further into debt. But, if that emergency didn't happen I've paid off my debt sooner, and saved interest while doing it. I'm betting on the BIG emergency not happening in the short term. I'm talking about having a small EF for a period of about 2 or 3 years or so, not decades. My EF fund right now is at $2800, which will cover anything short of a disaster. Car repairs, roof leaks, that sort of thing.
As for job loss, well, there is unemployment for one. Second, if either I or my husband lost our job, the one that is unemployed A) due to our professions, should be able to find work in a short amount of time and B) if a new decent paying job can't be found for some reason, an $8 an hour job or two would earn enough money to keep our heads above water once the unemployment ran out as long as the other person still had a "real" job. If we both lost our jobs at around the same time (extremely unlikely) and we both couldn't find decent paying work (also unlikely), then we'd have a problem. But if push came to shove, we could sell the house, pay off all of our debt (and I mean ALL of it, we've got the equity to do it) and we could actually live off of both of us making as little as $8 an hour full time (cheap apartment and bare minimum expenses. Not fun but what choice would we have?). In a situation where we both lost our jobs and couldn't find new work, unless we had a huge emergency fund, we'd face losing the house anyway, it would just take a little longer to get to that point.
Now our goal once we pay of the consumer debt is to max out the EF fund to six months worth of living expenses.
Long term it's the safest bet, I completely agree with you there. But why keep $10k in the bank while having $16k worth of debt? Pay off half the $16k and then work like mad to pay off the the $8k that remains while keeping $2k in the bank. Once the $8k is paid off, you've got a ton of cash left over each month and you can replenish your savings in no time.
Read Dave Ramsey's "Total Money Makeover", he basicly says the same thing (only he recomends having only $1000 in an EF fund while repaying debt, but the book is several years old, inflation you know!
). He says on average people who follow his plan are out of debt (except their house if they have one) in 2-3 years, so again we're talking a short time frame to be "working without a net" so to speak. You'd like this guy, Steve, when he says cut the "wants" out of the budget he
really means it! I don't care for his investment advice, but his getting out of debt advice is spot on.
Anyway, generally speaking, anyone with a large amount of debt likely has no savings at all, anyway. They'd have to pay the minimum on their debt while saving up 3-6 months living expenses, and only then start paying down the debt. If they are in that kind of financial distress, likely they aren't good savers to begin with. They'd likely put money in savings each week, only to then take out again on things that aren't really emergencies. Meanwhile their debt isn't really being paid down because they are only paying the minimum. If they just pay their extra money towards the debt, they can't get that money back again. It forces them to stay on budget as long as they are paying what they should for debt reduction. By the time they've paid off their debt, they are now "trained" to stay on budget, afterall they've been doing it for a couple of years now, they've learned that disapline. Saving up an EF should be a piece of cake and likely won't take too long.
Now of course, this is what DH and I feel comfortable with, for other's, they want that peace of mind of a fully funded (or at least a large) EF. Maybe they are in an uncertain industry, maybe they have young kids (DH and I don't have kids, though we plan to!). Everyone should do what feels best to them. Numbers wise, it doesn't pay to have a ton in savings while paying high interest debt (although our debt is 0% at the moment) if your time frame for debt repayment is relatively short. Odds are that the BIG emergency won't happen in a short time frame. And if it does, at least your debt is a lot smaller, it will take less money to 'stay afloat' until the crisis passes.