Should Emergency Funds include debt payments?

[StepRightUp]

Hey guys,

Helping out my sis and asked her to create a monthly list of barebones expenses for an EF. But she has a fair amount of debt.

She got a new job and will get paid out about $2800 after taxes for unused vacation time.

She has no EF so I'd like to have her use a portion of this $ for the EF but I'm unsure if debt payments are included in calculating an EF. I created mine with my student loan payments in mind.

What do you guys do?

[disneysteve]

I would definitely include the minimum required debt payments as part of the EF. I certainly include our mortgage payment (our only debt) in our EF.

[jpg7n16]

I agree with DS.

Imagine you'll have $0 income for 3-6 months and then your income will start back up: what would it take for you to survive for 3-6 months?

You'd still have to pay your mortgage/rent, car payment, food, utilities, credit card bills, student loans, things like that. But you likely wouldn't go to a fancy dinner each week, or pay extra on your credit cards. And you also wouldn't be saving cause you need to hold onto as much cash as possible to last as long as possible.

So you wouldn't include discretionary debt payments, or lavish expenses, or savings - but definitely minimum payments and mortgage payments as DS said.

[bjl584]

Yes.

The idea is to have 3 to 6 month worth of expenses. A fixed loan payment for a mortgage, car, education, CC, etc. are expenses that can't easily be gotten rid of in the event of a job loss or some other circumstance.

So, you should definitely include those things when you are drafting up a list of expenses.

[littleroc02us]

When I was paying off my debt ($50000) I followed the David Ramsey plan and I've never been better because of it.

1. $1000 EF
2. Pay off debt from smallest to largest (motivates the mind to conquer more debt)
3. Build EF to 3-6 months

[StepRightUp]

Thanks guys. I think I will suggest she puts $1,000 of the $2800 towards an EF and devote the rest to some high interest debt she has. And I'll keep minimum payments in mind for an EF.

[Aleta]

If your sister can figure out how much she needs each month, she can start out with 1 month of emergency money, then add more till she has 2 mos, etc. Yes, definitely include debt minimum pymt amounts as these will have to be paid.

[disneysteve]

You'd still have to pay your... student loans

Maybe. Maybe not. You might be eligible for a deferment or forbearance in the event of an emergency/hardship/job loss, though it might take a month to get the paperwork processed.

[bjl584]

Maybe. Maybe not. You might be eligible for a deferment or forbearance in the event of an emergency/hardship/job loss, though it might take a month to get the paperwork processed.

You would probably be stuck with them for a month as you said. It depends on your billing cycle. Mine are due on the 7th of every month, so if I called them early enough in the month I may be able to have the forebearance kick in before the following month's payment wa due. I never had to do this, so I can't say for sure.

[FinanceVideoGuru]

Emergency Fund

It is a good idea in my opinion, that a good emergency fund contain 2 months worth of all expenses.
By that I mean;
2 months worth of Rent (including all utilities)
2 months of car payments ( including insurance, maintenance, and Gas)
2 months of food (averaged for groceries, and fast food habits)
and yes
2 months of all minimum payments on your debts/loans/credit cards.
( I am saying minimum payment because in an emergency, you would want to at least keep payments on time as to not incur any penalties or late fees.)

This can be a hard fund to attain, but with a clear goal in mind and some discipline, it is easily achievable. I hope this helps.
Good Luck.
Keep it simple, Keep it handy, keep it safe!

[bjl584]

It is a good idea in my opinion, that a good emergency fund contain 2 months worth of all expenses.
By that I mean;
2 months worth of Rent (including all utilities)
2 months of car payments ( including insurance, maintenance, and Gas)
2 months of food (averaged for groceries, and fast food habits)
and yes
2 months of all minimum payments on your debts/loans/credit cards.
( I am saying minimum payment because in an emergency, you would want to at least keep payments on time as to not incur any penalties or late fees.)

This can be a hard fund to attain, but with a clear goal in mind and some discipline, it is easily achievable. I hope this helps.
Good Luck.
Keep it simple, Keep it handy, keep it safe!

I recommend holding 6 month worth of expenses, 8 to 12 if you are self employed. 2 months goes by pretty fast.

[Hector]

In normal situation,
If I want to have EF worth six months, I would see my total expense for last 6 months and would set that up as my EF amount.

[Shewillbemine]

I'm not a big fan of emergency funds when one still has high interest debt. You're only prolonging and increasing the debt load. Although for some individuals, the placebo effect of having a liquid amount of EF might be a positive thing. Someone with $500 in his wallet and $1000 debt actually has -$500 (even less, depending on interest on debt).

[DebbieL]

Yes, absolutely include debt repayment amounts in emergency fund calculations.

[solvision]

If the debt is part of the regular monthly expenses, then you should definitely include it in the emergency fund.