Severance Pay vs. Emergency Fund

[corn18]

I have been debating dumping 6 mo cash into an EF to cover expenses if I lose my job vs. paying off all my auto debt. That makes me nervous as I would have no cushion in case I lost my job. That got me thinking about what happens if I lose my job (not fired for cause but let go). I have a severance agreement that at this point pays me 3 months salary and any unused vacation. After taxes, that covers 6 months of EF if I don't pay off the cars. It covers 8 months if I do pay off the cars. I am comfortable with the challenge of finding a new job at the same pay in 8 months. I am very comfortable with the challenge of finding a job to at least cover my EF monthly expenses.

So, I think I am going to pay off the cars and put $10k into an EF just for emergencies other than job loss (medical, car breaks down, furnace stops working, that sort of thing). This accomplishes 2 things:

1. The severance lasts longer because my monthly expenses are much lower
2. I can find a job that pays less and still cover my expenses

I am not expecting to lose my job. Just paranoid by nature.

Tom

[disneysteve]

II am not expecting to lose my job. Just paranoid by nature.

Most of us don't expect to lose our jobs but it certainly happens. That's part of what EFs are for. Everyone should have money set aside "just in case". I also think getting rid of debt, which reduces your monthly expenses, is a great idea. That EF goes a lot farther when your expenses are lower.

[scfr]

So, I think I am going to pay off the cars and put $10k into an EF just for emergencies other than job loss (medical, car breaks down, furnace stops working, that sort of thing).

Do you currently have enough cash to pay off the car loans AND put $10K in to an EF, or are to talking about doing this over a period of time?

[corn18]

I have some options there. I get my bonus in March. Conservative estimates will allow me to pay off 3 of 4 cars and put $10k in an emergency fund. If I get a bit more than my conservative estimate and our company stock price stays as high as it is right now, I will have enough to pay off all 4 cars but then none left to make an emergency fund. But with all 4 cars paid off, I have a lot of excess income each month, so it won't take long to get $10k in an emergency fund.

[scfr]

To get some background, I did a thread search, found your thread on the car loans, and skimmed it. First of all, congratulations on the progress you have made so far. I see that you have taken some good steps to cut your monthly expenses. My suggestions re "EF vs car loan" follow:

1. Use the money that you are now saving each month (due to reduced expenses) to build up your EF. Don't let that money get spent on something else. (In other words, no remodeling, no lavish holiday spending, etc.) By the time March rolls around, you should have a pretty nice EF built up.

2. Check your car loans and make sure that early payoff is allowed, and that there is no early payment penalty. If it's not allowed or there is a penalty, this discussion may be purely academic.

3. Assuming early payment is allowed and penalty free, when you get the bonus pay off Cars 1 & 2 for sure (the ones with 3%-plus interest rates). Get your EF to where you decide it needs to be. If there is money left, pay off part or all of Car Loan 3.

4. Then, start putting the money that would have gone to Car Loans 1 & 2 (and maybe Car Loan 3) and use it to start paying down Car Loans 3 and/or 4. Once you start throwing that extra money at them, those last 1-2 loans will be gone in no time.

5. When all the car loans are paid off, start putting some of the money you had been paying towards the loans in to savings as a "Car Fund" so that the next time you need to buy a car you will have the option of paying cash. Vow to never again put yourself in the position where the only way you can afford to buy a car is to finance it.

6. Put the rest of the money that you had been paying towards car loans to another savings goal such as retirement.

7. No more cars for your daughters that they don't pay for themselves. I think you already realize this.

Beyond the question you asked about EF vs. Car Loan, I have a couple other comments:

- If you were laid off, would you be eligible to collect unemployment? If you are, that would be another way to stretch out your EF while you look for work.

- Based on what I have observed in my personal life, at work, and here on the SA boards, it is MUCH harder to find a new job once you hit 50+. And it seems like almost no one in the 50+ range finds a job that pays as much as what they had been earning. Most take pay cuts. You're not 50 yet, but you're getting close. (No offense at all. I'm older than you.) Look around your company. How many 60+ year olds do you see in positions equal or higher to yours? Probably not too many. Where do you think they all went? So, don't build your long-term plan based on being able to find work at the same pay grade right away. Fortunately, you still have time to prepare for any possible future layoff or reduction of income. You are making great money, and you will have no non-mortgage debt once the cars are paid off. NOW is the time to save, and you have the means to do it!

- You mentioned using your EF to pay for irregular expenses such as new furnace, car repairs, etc. If you are going to use your EF both as a funding source for those expenses, AND for the "worst case" scenarios such as unemployment, disability, serious illness, etc, then you will want to have a larger EF. If you are going to have a minimal EF, then you will want to have other savings set aside to pay for irregular expenses.

- I noticed that there was some talk on the car loan thread about weight loss. Now that you've "digested" The Millionaire Next Door, another personal finance book you may enjoy is "The Net Worth Workout: A Powerful Program for a Lifetime of Financial Fitness" by Susan Feitelberg. It compares financial fitness to physical fitness (Earning = Metabolism; Spending = Calorie Intake; Saving = Strength Training; Investing = Cardio Fitness).
Hint: Many of us frugal types like to look for books at the library.

Continued good luck to you. It's nice to see someone who is so willing to take feedback & suggestions.

P.S. - For what it's worth, the above advice is from a PAW.

[corn18]

Thanks scfr. I can't do #1 yet as I'm still trying to fix sins of the past. The horse is still with us @ $1k/mo. I have solid leads on donating her and I expect to complete that by year end. WIth the horse and the car loans, I'm running at a $1k/month deficit. That's after I made the budget changes and reduced other spending. The deficit was $2,500 / month. How about that for stupid? Luckily I had put some money in savings earlier this year and that will keep us break even until the horse and car loans go away. My goal is to live off my salary only and bank my pension and bonus. I am getting close to creating a plan that does that. Have to shave some discretionary annual spending (vacation, gifts, camps, flight lessons, allowance). Execution will be the hard part.

That 50 comment really hit home and helps clarify my path forward. I have had this nagging feeling that the best thing I can do right now is reduce expenses as much as humanly possible. That accomplishes 2 things:

1. I make more salary than I spend (not the case right now) and I can save a lot
2. If I do lose my high paying job, I can find another job at lower much pay and still be ok. The pension really helps

If I'm carrying all of that debt, I don't have those options.

My wife was reading The Millionaire Next Door last night in the tub. Way cool. I will read the book you recommended.

I started a spreadsheet on my net worth and retirement scenarios. Glad I did. If I didn't make any changes, I could not retire. Ever. It was an eye opener to see what was required to retire at 65. And autos are depressing for net worth. They contribute initially and then quickly depreciate and are crap. Much better to have other investments. If I can stick to the plan, I have a shot at retiring comfortably at 60 and very comfortably at 65. Time is not my friend.

Tom