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Debt vs Emergency Fund

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    Debt vs Emergency Fund

    I have two debts. I owe for a car and a Home Equity loan.
    Normally I pay extra on each payment.
    My emergency fund is very small. I'm wondering if it would make more sense to make the regular payments instead of paying extra principal? I would take the extra money I had been paying on debt and shift it to the emergency fund.

    Details:

    Car loan = $4,014 @ .9% interest

    Home Loan = $16,041 @ 1.99% interest

    Emergency fund = $3,440 I have this in a money market @ .85% interest
    Last edited by EconoMutt; 09-08-2013, 07:34 AM.

    #2
    First, a little more info would be good... Namely, the monthly payments for each loan & the additional amount you add to each payment.

    Without that info, I'll say generally that you have some fantastic loan rates, and you don't necessarily have to race to get them paid off. However, I assume the home equity loan is variable? Once the rates start to rise (nobody really knows when that will happen though), your HEL rate will climb right along with them. So given that, I would personally keep sending the extra payments to the HEL. The car loan (which I'm assuming is a fixed rate), I might consider stopping those extra payments and sending them to your EF instead.
    "Praestantia per minutus" ... "Acta non verba"

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      #3
      Originally posted by kork13 View Post
      First, a little more info would be good... Namely, the monthly payments for each loan & the additional amount you add to each payment.

      Without that info, I'll say generally that you have some fantastic loan rates, and you don't necessarily have to race to get them paid off. However, I assume the home equity loan is variable? Once the rates start to rise (nobody really knows when that will happen though), your HEL rate will climb right along with them. So given that, I would personally keep sending the extra payments to the HEL. The car loan (which I'm assuming is a fixed rate), I might consider stopping those extra payments and sending them to your EF instead.
      The car loan is $260 per month and the Home Equity Loan is $830.

      The Home Equity loan is fixed.

      I normally send an extra $100 per month on my payments.

      Comment


        #4
        Originally posted by EconoMutt View Post
        The car loan is $260 per month and the Home Equity Loan is $830.

        The Home Equity loan is fixed.

        I normally send an extra $100 per month on my payments.
        R-eee-hee-heeeally...... Sweet deal!

        In that case, I would definitely recommend that you take all of the extra (from both the car loan & the HEL) and send it toward your EF. It'll give your EF a much needed boost, and with the good interest rates (plus the HEL interest is likely tax-deductible), you can drag those out a little bit while you prioritize your EF. Given your circumstances, that's going to be a great option for you.
        "Praestantia per minutus" ... "Acta non verba"

        Comment


          #5
          Originally posted by kork13 View Post
          R-eee-hee-heeeally...... Sweet deal!

          In that case, I would definitely recommend that you take all of the extra (from both the car loan & the HEL) and send it toward your EF. It'll give your EF a much needed boost, and with the good interest rates (plus the HEL interest is likely tax-deductible), you can drag those out a little bit while you prioritize your EF. Given your circumstances, that's going to be a great option for you.
          That's the way I'm leaning. I really need to get the Emergency Fund pumped up and I'm not really going to save a lot of interest by paying the loans off early.

          Thanks for the advice.

          Comment


            #6
            Debts are always a priority but if the lenders do not offer rebates, then, channel your money to other needs.

            With the transaction that you are having, you can definitely put the money on your emergency fund to make better use of it. To make things even better, invest the money in a profitable industry.

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              #7
              Emergency fund is definitely necessary but debts are a burden. I personally feel that it is better to pay off the debts and get rid of them so that you can provide lump sum amount toward the emergency fund later on.

              Comment


                #8
                Get rid of car loan first

                Emergency fund is very important. What about just overpaying on the car loan a s the apr on it is much higher. Once you have got rid of car loan then focus on building emergency fund more rapidly

                Comment


                  #9
                  My personal choice would be to finish the car payments as soon as possible. Make a big effort and get it done with it. EF is also important though, so at the end of the day it all falls down to how you feel about it. You can save a much as possible (and knock the car loan in the near future, if you really want to get over with it) or, if you're comfortable with the EF as it is now, pay off the car and then you'll have more room to breathe.
                  Personal Finance Blog | Dojo's PF Musings

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                    #10
                    I would build up the EF first. Never know when an emergency will happen. Your debt will always be there, so to speak.

                    Charlie
                    Last edited by jeffrey; 01-03-2014, 09:03 PM.

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