Emergency Fund & Debt
I've read the reports where the experts say you should have cash
for 3 months worth of bills set aside in an emergency fund. Some
of these experts say you should save even more than that. If you
are living in debt, however, could that money be better utilized
in other areas of you finances? What if you send the money in your
emergency fund to pay down your highest interest debt? What if you
have an emergency after doing so?
To begin, your emergency fund should be placed in a high interest
online savings account and getting no less than a 4% return. While
many may have their current emergency fund in a low paying brick
and mortar bank or even in cash sitting at their home, this is a
waste since you are losing on easy to get interest.
It has already been discussed how you can take your savings and
use them to reduce your debt (by paying off the lowest interest
debt first or by paying off the smallest debt first), but should
you take this one step further and include your emergency fund in
this debt reduction process as well?
If you use your emergency fund to reduce current debt, that money
would obviously save your more in interest paid than what you will
make from placing the money in savings account (even if it is a
high interest online account). While this is easy to see, It's
still difficult to give up that emergency fund because what if you
have an actual emergency and need that money. The answer to this
question is simple - you just cleared that much money in available
funds from your credit, didn't you?
Although you hope it won't happen, if your refrigerator stops
working or you need to repair your car, you can put that money
back on the credit card that you paid down. Doing this would still
keep you financially ahead because you already saved the interest
payments on that money when you sent it in the first place. In
essence, you are now using you credit card as your emergency fund
instead of cash.
You are much less likely to use that credit card for anything
unless it truly is an emergency and a lot of people delve into
their emergency funds a little here and there for things that they
should not. This will make it easier to stop making that mistake
and will save you in interest paid as you work your way out of
debt.
Everyone wants to have a savings account at some point and an
emergency fund to guard against unfortunate occurrences in our
lives, but if you are living in debt, that debt, as well as the
interest it accrues is your current emergency.
THIS CONTENT IS FOR INFORMATIONAL PURPOSES ONLY. THIS IS IN NO
WAY GIVING ANY LEGAL ADVICE OR REPRESENTATION. THE INFORMATION
CONTAINED HEREIN WAS COMPILED FROM VARIOUS ARTICLES. FOR ANY LEGAL
ADVICE OR REPRESENTATION SEEK YOUR OWN LEGAL COUNSEL.
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