Last week there were plenty of posts relating to debt management and reduction. (Imagine that. Personal finance blogs that talk about debt management and reduction. Shocker!) And a debate started over the need for an emergency fund. I do not want to come across as if I am saying emergency funds are bad. However, I do believe that paying off debt is much more important.
If you are able to put a substantial amount of cash on your debt each month like I am you should be able to disregard the need for an emergency fund if you meet all of the following conditions:
- You know, with absolute certainty, that you will have your job for the duration of your debt repayment
- If, even after you paid just your minimum payment, have a decent chunk of change. I would say nothing under $400.
- Have no potential unexpected expenses. Ex – If you had a rental property you should always have an emergency fund because you never know when a toilet will break, a water tank will blow, or drain becomes plugged. A car should not be included in this. Someone who sticks with their maintenance plan should not have a bill of over $500 unless they are careless. Please correct me if I am wrong with any examples.
If you are badly in debt, you probably will not meet any of the above criteria.
Personally, I will not be funding an emergency fund other than with Simply Save offered through TD that deposits $0.50 every time I use my debit card. All of my left-over cash will be transferred over to my line of credit. I do this to save on interest, and shorten the time it will take to pay off my line of credit balance. By placing even $100 into another account would make me have to pay almost an entire month extra of interest.
What would I do if I got hit with a huge expense? Even if I had an unexpected expense of over $400 I would not be ashamed to put it on credit. That is what credit is there for is it not? It is not as if I would be using the credit to buy a new TV or go to the bar.
Using credit for unexpected, necessary, expenses is 100% OK in my books.
I do not want to discredit emergency funds because in most situations it is better to have that buffer while paying off debt. An emergency fund allow you to truly place 100% of your financial attention on your debt and not worry about having to pull out more debt.
Personally, I will be starting an emergency fund after I have paid off my debt.
I would very much like to hear your opinion on this matter. Please comment and share.
**Disclaimer: I am in no way, shape, or form a financial planner. Nor have I taken an courses in finances. The above post is my own opinion.**