Advice on EF

[Bob B.]

For three years, my family has operated without an EF/revolving loan account. All of our credit cards have been closed. As we pay off balances, we're not creating "wiggle room" from which to borrow in emergency.

Last week, I applied for a new credit card. The primary purpose of this card was to act as a source to transfer debt from a very high rate card (16.99% APR). The new credit card has a $5,000 limit. When the balance transfer is complete, I'll have a bit more than $2,600 in available credit on the card.

My question is: should I establish a $1,000 EF in a savings account, and cut up the credit card. Or should I rely on this new credit as my effective EF? After the 6 month introductory period is over, the APR spikes up to 20.99%

I know I should have 3-6 months expenses set aside as an EF. That is my long-term goal, after the $17,000 credit card debt is paid off (projected to be Dec. 2012).

[Fizgig]

Absolutely save money and do not consider credit to be an emergency fund. Borrowing may solve the immediate crisis, but creates more problems in the long run. I'm not a 100% Ramseyite, but I do think his plan for debt elimination would help you tremendously.

[Petunia 100]

The danger of relying on credit to be your EF is that your credit limit can be lowered at any time, or your account can be closed at any time. Then what will you do? Cash in the bank cannot be taken away from you at the whim of a credit grantor.

[bjl584]

Absolutely save up an EF. Start with $1000, then expand it to represent 3 to 6 months worth of expenses.

Credit cards, HELOC's, and other revolving credit accounts should not be used for Emergency Funds. An EF needs to be cash that is readily available to use for emergencies which doesn't cause you to take on more debt.

[Bob B.]

I appreciate the responses so far...

Just so my situation and question are clear:

If I were to set aside $1,000 for an EF, I would be diverting money that would otherwise be used to pay down high interest debt (8.9% APR).

[Fizgig]

Yes, I think we all understand that. It's a worthwhile trade - The first step to getting out of debt is to stop relying on it.

[disneysteve]

I appreciate the responses so far...

Just so my situation and question are clear:

If I were to set aside $1,000 for an EF, I would be diverting money that would otherwise be used to pay down high interest debt (8.9% APR).

Yep. That's exactly what needs to be done. It is more important to have a cash reserve than to repay debt regardless of the interest rate. Otherwise, when an unexpected expense arises, and it will, your only choice is more debt.

Debt is not an emergency fund.

[maat55]

I appreciate the responses so far...

Just so my situation and question are clear:

If I were to set aside $1,000 for an EF, I would be diverting money that would otherwise be used to pay down high interest debt (8.9% APR).

I agree with the others. Credit cards are not EF's. Putting away 1k in cash helps you change your mental habits with cards.

[danieldroga]

It is not good to rely on credit cards especially on your EF.This is really a big disadvantage on your part.

[creditcardfree]

I appreciate the responses so far...

Just so my situation and question are clear:

If I were to set aside $1,000 for an EF, I would be diverting money that would otherwise be used to pay down high interest debt (8.9% APR).

Yes, I agree. You should establish at least this minimum emergency fund before paying down ANY debt above the minimum payments. You could also look at other ways to fund the EF faster, by having a garage sale or selling your unwanted furniture on craigslist. Look for side jobs you could do for cash. Sell used books online or at a used book store. Sell old cell phones and electronics. Children's clothes sell well on ebay, consignment stores, and garage sales.

Good luck!

[BMEPhDinCO]

I agree with others - you NEED an EF, even with debt. However, where I disagree is the amount.

What is your car deductible? What is your house deductible? (Or renter's insurance?) What is your medical deductible? Add those up and THAT's the amount that should be in your EF. IF it's less than $1,000, save less, if it's more, you need more. But you should be able to cover that amount and then go nuts on the debt.

[DebbieL]

I can think of MANY things that aren't covered by insurance. The emergency fund should be far greater than most people's insurance deductible. I think $1000 is the absolute bare minimum starter point (and should be added to until at least a few months of living expenses are saved).

[BMEPhDinCO]

I can think of MANY things that aren't covered by insurance. The emergency fund should be far greater than most people's insurance deductible. I think $1000 is the absolute bare minimum starter point (and should be added to until at least a few months of living expenses are saved).

DebbieL, I agree that there are many other issues, but I stand by going with the deductible because, in most cases, it is higher than $1,000 and thus if you only save $1,000 as the "absolute minimum" you are at a higher risk than saving the amount of all your deductibles. For example, my car is $500 for one type of accident, $1,000 for another - we have two cars. My health insurance is $500, so is my husband's and our house is $1,000 except for some types of damage, which are $250. Thus, I would want a minimum of $4,000 - to cover the cars, house, and health. $1,000 would NOT be enough, even as a "bare minimum".

To the OP: save at LEAST $1,000 if your deductibles aren't as high as mine, but really try to have all your deductibles in savings and at least $500 for "other stuff that will happen".

I know it's hard, but it really is worth it when an accident occurs and you can focus on other stuff besides the bill.

[nick__45]

I appreciate the responses so far...

Just so my situation and question are clear:

If I were to set aside $1,000 for an EF, I would be diverting money that would otherwise be used to pay down high interest debt (8.9% APR).

Can you dump this debt onto a 0% credit card you just got? Considering the fact that I can't get more than 1% on my EF, I would never pay interest on anything beside my mortgage.

[mans442]

Yes, as most have said, eliminate the possibility of the credit card for an emergency. It will only hurt your position if you use it. I recommend to target $1500 to $2000 for the EF fund if possible. If you can get to $1000, then it probably wouldn't take much more effort to get another $500 or so. For example, if you get hit with an unexpected car repair bill, you are not wiping it all out and getting discouraged. Most significant repairs today always seem to hover around $800, so going from $1500 to $700 is better than going from $1000 to $200.

I did my EF quickly be joining a credit union and having it deducted from my paycheck. I dragged my butt on that for about a year before doing it, and I wished I did it earlier. Sometimes it is easier to not have to manage smaller amounts of money slated for savings.

Good luck!
Jason