Ann-Notated: Emergency Fund vs. Debt Repayment - Its Not That Hard to Homeschool (2024)

Have you ever wondered if what you were doing was really the best thing? Like when you ordered the White Chocolate Mocha and wondered if you should have gotten the Pumpkin Spice? Or when you walked out of the store with 5 items during a buy-one-get-one sale? Or when you set the alarm for 5am to get up and exercise? :-)

I've been wondering lately if my husband and I are on the best path for our personal finances. We have been poo-pooing the need for an emergency fund and instead have theoretically been putting all of our extra (therein lies the rub) funds towards paying down debt. It is really hard to justify having money sitting in the bank that could be saving us interest, you know? At least that's what we've been telling ourselves.

Ann-Notated: Emergency Fund vs. Debt Repayment - Its Not That Hard to Homeschool (1)

For awhile now I've struck a middle ground by working towards living on last month's income. I figure if I am paying this month's bills with last month's money, then I have a built-in emergency fund when I need one. The problem with that plan is that I needed one almost immediately after I had accumulated our buffer (or at least I needed the cash to purchase a car…um…), and so here I am again trying to set that money aside. And nothing more than the minimum is going towards debt.

So I decided to do some research and share it with y'all, since it's been awhile since I've published an Ann-Notated. Turns out there are a lot of different ways to look at this conundrum. The decision of saving for an emergency fund vs. paying down debt is almost as debated as co*ke vs. Pepsi. So grab your favorite snack and have fun perusing the following articles!

What do the experts say about building your emergency fund vs. paying down debt?

Is Suze Right? Do Emergency Funds Now Trump Debt Repayment? — The Simple Dollar critiques Suze Orman's advice to save an emergency fund equal to 8 month's worth of expenses. Wow, that's a lot. His takeaway? “Everyone's personal sense of risk is different.”

Emergency Fund vs. Debt Snowball: What's the Top Priority? — This article at Get Rich Slowly builds a case for either option. Both must happen eventually, but the order is not a big deal. “For us, paying off the debts faster and staying in the risky position of having no safety net worked better psychologically. Paying off debt was something we could agree on. And once the money had been sent to the credit card company, there was no bickering over what to do with it (italics mine).” Hmmm, they've got a point there.

Should I Pay Down Debt or Build Up My Emergency Fund? — The people at YNAB (You Need a Budget) probably hear this question all the time. The advice is sound: “If I were you, I’d maintain the smallest buffer required to allow me to sleep at night” — but don't ignore the comments on this one. They make a pretty great read!

A Small Emergency Fund is Essential to Debt Payoff Success — The title of this article at Money Manifesto makes it obvious what their position is. The interesting part is why: because we are trying to build the habit of incurring NO MORE DEBT. If you pay down cards but then have to use them again to cover an emergency, you are not killing the behavior that started the problem in the first place. This one is an ouch for me, y'all!

How to Build Emergency Funds for Paying Off Credit Card Debt — The Nest has a solution I hadn't heard of before: whatever your extra funds are, use half for building savings and half for paying down debt. Then you can be accomplishing both at the same time.

Debt Reduction, Emergency Savings: The Balanced 75/25 Method — Debt Free Adventure has another way to split it up. Put 75% available funds towards debt, and 25% towards savings. This is AFTER already completing a $1000 emergency fund, though. But I like what the author said about figuring out what worked for him — he didn't like everything going out and nothing being paid to himself.

Whether to Save and Invest When You're Getting Out of Debt — The Finance Girl gives a list of 15 factors to help you decide which would be best for your situation.

Emergency Fund or Pay Off Debt? — Michelle at Making Sense of Cents is not comfortable without an emergency fund that is large enough to cover the possibility of several emergencies happening at once. But she opens the question up for readers to answer, so don't neglect the comments.

Springy Debt Instead of a Cash Cushion — Mr. Money Mustache says get yourself a Home Equity Line of Credit (HELOC), and you can draw from that when you have an emergency. Can't say I've ever heard that one before. I guess then if you're in debt, you're in debt to yourself…

Do You Have an Emergency Fund? — Johnny Moneyseed (gotta love some of these blog names!) is not willing to negotiate about having an emergency fund; it's necessary, he says. But the total should include the amount of the deductibles for your house and car, just in case something happens to both of them at once. I wonder if he shouldn't be including his health insurance deductible, too…

Should You Pay Off Debt or Save for Retirement? — Dough Roller says get the company match on your retirement before doing ANYTHING else. We do have this in place, although we tried to get out of it and couldn't. The Man's employer doesn't match very much. I'd be curious to do the math on this one.

10 Smart Ways to Build an Emergency Fund — Technically not on topic (because it's not about the debate between emergency funds and debt payoff), but since Ruth at Living Well Spending Less is one of the gurus of the frugal blogging world and a personal hero, I decided I'm allowed to do what I want on my own blog. :-) And besides, if you've read all of the articles on this page and have decided building an emergency fund is the way you want to go, then this is a great place to start.

I confess I do feel better when we have money set aside. The trick is to NOT DIP INTO IT. Still working on that one…

Track of the Week (although I don't have weekly Ann-Notateds anymore, I'll keep the same name here): Can't Buy Me Love, by the Beatles. It has been one of my faves for a loooooong time. Michael Bublé has recently done a cover which is also quite nice.

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Ann-Notated: Emergency Fund vs. Debt Repayment - Its Not That Hard to Homeschool (2)

Ann, former owner of It's Not That Hard to Homeschool:homeschooled for 22 years and has graduated all five of her children. She believes that EVERY mom can CONFIDENTLY, COMPETENTLY -- and even CONTENTEDLY -- provide the COMPLETE high school education that her teen needs. Ann's website, NotThatHardtoHomeschool.com, offers information, resources, and virtual hugs to help homeschool moms do just that.

Ann has written Cure the Fear of Homeschooling High School: A Step-by-Step Manual for Research and Planning, Save Your Sanity While Homeschooling High School: Practical Principles for a Firm Foundation, and recently Taming the Transcript: The Essential Guide to Creating Your Teen's Homeschool Transcript from Scratch (without overwhelm). She also founded the popular Facebook groups It's Not that Hard to Homeschool High School and It's Not Hard to Homeschool K-8, and in addition she voices the It's Not That Hard to Homeschool High School Podcast.

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Ann-Notated: Emergency Fund vs. Debt Repayment - Its Not That Hard to Homeschool (2024)

FAQs

Is it better to pay off debt or have an emergency fund? ›

Wiping out high-interest debt on a timely basis will reduce the amount of total interest you'll end up paying, and it'll free up money in your budget for other purposes. On the other hand, not having enough emergency savings can lead to even more credit card debt when you're hit with an unplanned expense.

Is it better to pay off debt or build savings? ›

You may feel more comfortable focusing on building an emergency fund before tackling debt. In situations where loans are secured at a favorable interest rates, you might prefer to save and invest in the hopes those returns will exceed the interest that accrues on your debt.

How much should I have saved before paying off debt? ›

Ideally, your longer-term goal should be to save at least three months' worth of living expenses in your emergency fund in the event of a serious life change or loss of income. However, if you have high-interest debt and are juggling multiple payments, saving even just $1,000 can seem difficult.

Why is having a fully funded emergency fund so important when it comes to your financial well-being? ›

Having a reserve fund for financial shocks can help you avoid relying on other forms of credit or loans that can turn into debt. If you use a credit card or take out a loan to pay for these expenses, your one-time emergency expense may grow significantly larger than your original bill because of interest and fees.

What is the 50 30 20 rule? ›

The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings. The savings category also includes money you will need to realize your future goals.

How much savings should I have at 40? ›

By the time you reach your 40s, you'll want to have around three times your annual salary saved for retirement. By age 50, you'll want to have around six times your salary saved. If you're behind on saving in your 40s and 50s, aim to pay down your debt to free up funds each month.

Are millionaires debt free? ›

They have a financial plan

They plan for the future and look at many aspects of their finances, such as savings, debt management (yes, even millionaires have debt), insurance, taxes, investments, retirement and estate planning.

Is it smarter to pay off debt or invest? ›

Investing and paying down debt are both good uses for any spare cash you might have. Investing makes sense if you can earn more on your investments than your debts are costing you in terms of interest. Paying off high-interest debt is likely to provide a better return on your money than almost any investment.

How to pay off debt and save money at the same time? ›

7 tips on how to pay off debt and save at the same time.
  1. Create a budget. ...
  2. Prioritize your debts. ...
  3. Make more than the minimum payment on your debts. ...
  4. Consider debt consolidation. ...
  5. Set savings goals. ...
  6. Automate your savings. ...
  7. Cut back on unnecessary expenses.
Sep 19, 2023

How to get rid of $30,000 in debt? ›

Get in touch with a debt relief service

If you choose a debt management program, experts will typically try to negotiate your interest rates and payment terms with your lenders on your behalf. They'll also create a payment plan for you that fits your budget while getting you out of debt as quickly as possible.

What is a good monthly debt? ›

Debt-to-income ratio is your monthly debt obligations compared to your gross monthly income (before taxes), expressed as a percentage. A good debt-to-income ratio is less than or equal to 36%.

Is $5000 in debt a lot? ›

$5,000 in credit card debt can be quite costly in the long run. That's especially the case if you only make minimum payments each month.

What does Dave Ramsey say about CDs? ›

Ramsey has referred to certificates of deposit as "nothing more than glorified savings accounts with slightly higher interest rates." Ramsey warned that you shouldn't invest in CDs because average rates won't keep pace with inflation and because they aren't a good place to grow your money.

Why you shouldn't have an emergency fund? ›

Savings accounts don't even keep pace with inflation, meaning that an emergency fund is a money-losing proposition over the long term. Take the money you'd otherwise devote to an emergency fund and put it in something even as humble as a short-term certificate of deposit (CD)—that should give you FDIC protection.

How much cash should you keep at home? ›

In addition to keeping funds in a bank account, you should also keep between $100 and $300 cash in your wallet and about $1,000 in a safe at home for unexpected expenses. Everything starts with your budget. If you don't budget correctly, you don't know how much you need to keep in your bank account.

What is a good amount to have in an emergency fund? ›

Generally, your emergency fund should have somewhere between 3 and 6 months of living expenses. 1 That doesn't mean 3 to 6 months of your salary, but how much it would cost you to get by for that length of time.

Is it smart to have an emergency fund? ›

By having sufficient funds set aside for immediate but unexpected cash needs, you'll be in a much better position to weather short-term economic turbulence and market volatility while remaining on track toward your long-term goals and objectives.

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