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    Emergency fund question

    So I understand the importance of having an emergency fund when your debt is paid off and you are building your savings. But Dave Ramsey and others recommend having at least $1000 emergency fund. Mathematically, wouldn't I be better off paying that $1000 on my credit card, which I KNOW is accruing interest, instead of keeping it in my savings account, "just in case" I need it? Then if something happened I would charge it, but something happening is not a guarantee. Just wondering about the logic behind the math here... seems like this would cost me more money.

    #2
    Yes.

    There are some reason to have cash since a credit card can't always be used in emergency situations, but your reasoning is accurate. Many people think this will encourage you to use your credit card more so you shouldn't do it and then if you max it out, you won't have it there for your emergency fund. But if you are only looking at the best financial move, using the credit card as the emergency fund and paying it down instead of putting cash in a savings account will allow you to pay off the debt quicker.

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      #3
      I think it depends on your situation. I was facing this decision earlier last year.

      My situation was-
      I had 1440 on one credit card at 22.5% and 440 on another at 10.99%
      I had no savings
      I had two jobs
      I had no health insurance
      I had (and still have) an old bill which went into collections while I was unemployed I both had no insurance and no savings
      I had a car which randomly needs repairs from time to time and always needs its regular maintenance which happened to be tires at this point.
      I was planning a low budget wedding and paying for it in cash (about 4K was spent)

      After using one check from my part time job to put new tires on my car, I decided to put all the checks from my part time job in my emergency fund.
      I decided to pay off the small credit card balance asap and to drop payments on the other card when I could but most went to the wedding to keep it off the cards.

      I ended up racking up another 1K on the cards during this time somehow. After the wedding I started aggressively paying off the cards while continuing to put the cash in my emergency fund.

      In the middle of this process I had a medical emergency which was paid completely out of my emergency fund.

      I ended up paying off the cards in November. So in my case it was better to do both at once because I didn't want to rack up more expenses on the card should anything medical or car related to me happen.

      It sort of an individual assessment thing. I think at the very least I would have $500 in an emergency fund because you just never know and that could at least cover a new set of tires on your car or a small medical bill.

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        #4
        An emergency fund is peace of mind more than it is a financial strategy. I've heard several arguments against keeping cash lying around because it would make more if you invested it or if you paid off debt with it. But, that's not really the point of an Emergency Fund.
        Brian

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          #5
          Originally posted by bjl584 View Post
          An emergency fund is peace of mind more than it is a financial strategy.
          Actually I'd say mindset, not peace of mind. The point is to stop viewing your credit card as a source of funds. It is NOT. It is a form of payment. You shouldn't be using it to pay for things that you don't have the money to pay for. You should only use your credit card as a convenience so that you don't need to carry large amounts of cash.

          You wouldn't write a check if you had no money in your account (hopefully). You shouldn't use your credit card if you have no money in your account either.

          Have your EF. $1,000 is a decent place to start but it really isn't enough. One car repair could wipe that out easily.
          Steve

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            #6
            You (I'm using the generic "you" here, not you specifically, frugalredhead. ) set up an emergency fund rather than clearing a credit card because the reason you're in this situation in the first place is that you relied on your credit cards as your emergency fund, couldn't pay them back right away, and are now drowning in credit card debt.

            The purpose is to shift your mindset away from the "I'll just put it on the credit card" thinking.

            Yes, you're going to pay a little interest on that $1000 that you put in the bank rather than paying on the credit card, and if you only had $1000 in credit card debt certainly you might as well just pay that off and then start the savings. When you're looking at tens of thousands of dollars of credit card debt, however, that $25/month interest is a tiny drop in the bucket. (I speak from experience, here; I'm a good chunk into my debt repayment with now mostly low-interest cards/loans, and I still paid almost $900 in interest in February....)

            Personally, my emergency fund for now is about $1200, because my emergencies always seem to cost around $1300 and it's easier for me to come up with $100 than $300. (I could have made it $1300 and should probably make it $1500, but I happened to have a $1200 'side gig' payment come in so just socked that away.) Once I pay off the credit cards and 401(k) loans, I'll build that up quite a bit, and then tackle family loans and real estate loans.

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              #7
              What Steve said.

              My opinion: The payments you're making to the credit cards should be viewed as punishment, because you lacked the planning and discipline required to pay for whatever you bought with either cash or in full as soon as your CC bill arrived. Having an emergency fund enables you to avoid doing that again, and as you add to it after your CC debt is gone, you'll no longer have the "need" to accrue debt on your CC again, provided you also engage in budgeting.

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                #8
                While you certainly need an emergency fund, have you considered splitting in half right now provided that you have the money? Perhaps you can slowly start to build towards having this $1000 set aside for when you need while still paying towards your credit card debt. But as most people mentioned, unless you get a good grip on your spending, you will be back to square one before you know it.

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