Why Do I Need an Emergency Fund?

QM · 10-29-2008, 03:47 PM

I've read a lot of Dave Ramsey's book, and I have one question? Why do I need an emergency fund?...I know that you'll say "for an emergency", but that won't answer the real question.

Wouldn't it be smarter to pay down my line of credit with the money that I could put into the emergency fund? That way I'm lowering my monthly payments, and IF there should be an emergency, I use my line of credit?

Also, what is the emergency fund really for? If it's for "one of those hard times" that Dave Ramsey talks about, why can't I just use my line of credit?

**Greebo** · 10-29-2008, 03:53 PM

If you do not have a baby emergency fund, and you start paying down debt, and then murphy moves in, then you've go to go right back into debt to cover your emergency.

This tends to be a very demotivating experience.

It's psychological. Its not about the math, its about the people. If we were doing math, we wouldn't be in debt in the first place.

**rowdy35** · 10-29-2008, 03:55 PM

I keep one because a tree could fall in my backyard causing damage, someone could break into my car (and they did a week ago) breaking a window, my tenants could move out of my rental property, I could have a medical issue come up, etc. that is why I keep one. I only keep $5,000 in mine due to the amount of debt my husband and I are in right now. If you don't feel it is necessary to keep one you don't have to. It depends on your situation/goals/life/job security, etc.

**Contrary Housewife** · 10-29-2008, 04:36 PM

Yes, it is good to pay down your high-interest debt.

The idea behind an emergency fund is that when you need to use it you don't have to put yourself further into revolving credit-card debt. You are trying to wean yourself off paying interest on every purchase, by starting a cash fund to be used instead. You will eventually work yourself into the position where you have both a line of credit, and a pool of cash, instead of a monthly debt payment.

When you have an emergency, it's bad enough that it costs you so much, you don't want to add compounded interest on top, and spend months or years paying for it.

**Gardengal18** · 10-29-2008, 04:40 PM

The Emergency Fund is so that you don't wind up putting an Emergency on a Credit Card and make the debt worse.

**mnmarty03** · 10-29-2008, 05:26 PM

Everyone else is right! Emergency funds are a great way to get off of credit cards and Line of Credit!

It's counter-intuitive at first, but if you save up money, when something happens you won't have to use your Line Of Credit or credit card. Someday you can say, "I don't have a line of credit anymore!" And can rest in the fact that if something happens you can pay for it in cash that you have set aside. I recently had to use mine up for things, but it was nice knowing I had it there to use when I needed it.

That's why we have emergency funds.

**JENROY** · 10-29-2008, 06:59 PM

I was happy I had listened to all these wise women about the EF. I had mine fully funded and then paid off the cc debt. When that was paid off, I went back to adding to the EF. I lost my job and didn't have to worry (well, not TOO much, anyway) because I knew I had that extra little bit.

**Persimmon Lace** · 10-29-2008, 09:30 PM

Depending on your income the baby ef is only 500-1000 dollars. That is sufficient to keep murphy away while you are paying down debt. The big ef is for after you pay down all your debt!

**dcompton** · 10-29-2008, 09:53 PM

I can see both sides. The emergency fund is good security. However, it is also true that while you collect it, you are carrying higher balances and paying more interest on the line of credit. If you have to add to it, it's definitely a downer, but in the interval you have already paid off more of the debt and interest. I paid off most of my debt, which wasn't high and had low interest, before worrying much about an EF fund. This was not a matter of principle, it's just what ended up happening.

I agree that psychologically, it is better to pay cash for things that come up and not see the balance of the debt go back up. And if you are expecting known expenses to come along - a car that needs frequent repair, living in an area subject to natural disasters, that sort of thing - the EF if definitely a need. And in these times, it is really a good idea to have it.

I don't know what your situation is and how much you can put toward either, but why not get a small EF in place, maybe only $500, and then starting working on the line of credit. When you have made some progress on that, add more to the EF. I can really understand your wanting to see the debt dwindle. But especially if your source of income is not very secure, go for the EF. It can be a life saver.

So ... my answer is, I guess, both yes and no!

**ironmaiden** · 10-30-2008, 12:48 PM

Your thinking sounds like "debt is okay". A problem comes up then debt is the answer. With thinking like that you'll always have debt. Short of your mortgage and student loans - debt should be your enemy.

The purpose of the emergency fund is to be able to take care of yourself. Life happens. Things come up, but hey, you're independent and can handle it. Life is under control.

Also, banks are starting to revoke those lines of credit and thus if another "loan" is your answer to your problems and the loaner yanks away that ability, you'll be up a creek.

My suggestion, get some control and then get rid of all debt that is not mortgage, car, student loan. Build up the EF even more. Then split the difference between the rest of the debt and savings.

**LexTysMommy** · 10-30-2008, 01:41 PM

I paid off all my debt ( but house ) before i started my EF. now that i have one i cant see racking up any more debt. I tried to save for EF while paying off debt but I always felt the money was "just sitting there" and i was getting more interest added on.

I can see both sides, it really depends the type of person you are, how well you can save, pay off things, etc. I had a 0% credit card that I used for EF for many years, but now its 8% so unless i can pay off monthly I do not charge anything!

**kita** · 10-30-2008, 06:03 PM

Because somethings have to be paid for in cash or else get a cash withdrawel on a credit card...which is buckets of interest.
Yesterday, in a wild conflux of events, I needed some cash and because the bank was holding a large check until it "cleared". I had to beg for a half-rate bus ride so I could get to a large train station so I could charge my train ticket.
Sadly my EF had been drained over the last fi\our months of unemployment. But yes, you need an emergency fund.

**khaski** · 10-30-2008, 08:26 PM

If you pay down your line of credit to make room for an emergency and you don't save any $ for an emergency, you're guaranteeing you'll stay stuck on that rat wheel- running and running but never getting anywhere. You'd stay in debt, as emergencies ALWAYS come up, Also- think about it- you pay MORE paying the interest- do yourself the favor, save the $1k. The interest you're NOT paying by using cash for that emergency instead helps pay off the debts faster. It also helps, when the emergencies creep up, to use the cash instead to feel like you didn't just blow all your hard work.

it;'s really up to you- but if you're serious about working to get and live debt-free, you need to get yourself that initial cushion.

**Natalie** · 10-30-2008, 08:42 PM

Originally Posted by khaski

If you pay down your line of credit to make room for an emergency and you don't save any $ for an emergency, you're guaranteeing you'll stay stuck on that rat wheel- running and running but never getting anywhere. You'd stay in debt, as emergencies ALWAYS come up, Also- think about it- you pay MORE paying the interest- do yourself the favor, save the $1k. The interest you're NOT paying by using cash for that emergency instead helps pay off the debts faster. It also helps, when the emergencies creep up, to use the cash instead to feel like you didn't just blow all your hard work.

it;'s really up to you- but if you're serious about working to get and live debt-free, you need to get yourself that initial cushion.

And, if you still gotta have that credit card, and if you have the money in your EF to pay for that emergency, you can charge it to your credit card, go to the bank, put the money in your checking, then go pay off that emergency on that credit card.

**Greebo** · 10-30-2008, 09:28 PM

Also - just remember - if you save up cash, have an emergency fund, and THEN pay off the debt - if you don't like it? You can always go back into debt.

Rarely is that which is easy worth while. Rarely is that which is hard, not.