Emergency fund or debt?

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Topic Author
ScooterBog
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Joined: Fri Aug 28, 2015 11:07 am

Emergency fund or debt?

Post by ScooterBog »

Hi, been reading for awhile, but first post …

We recently started trying to get our finances in shape. Goal #1 was creating a budget and reducing expenses, and we’ve done that/doing it with much help from YNAB.

Goal #2 is to establish an emergency fund (currently $0). Without it, I feel we’ll just keep compiling more debt when something inevitably crops up. Plus it’ll help me sleep better.

Given that we’re currently paying about $700 to service non-mortgage debt on about $28K, is it a wise course of action to focus on the emergency fund prior to attacking the debt?

The $700 is killing us cashflow wise, plus I’ve never had this much debt, and it pains me. Debt includes:

0% credit card - $9K - $275/mo (3% transfer fee on 15 months so effective 2.4% APR)
0% credit card - $3K - $60/mo (3% transfer fee on 18 months so effective 2% APR)
1.9% auto loan - $11K - $333/mo (approx 2.5 years remaining)
4.5% HELOC - $5K - $25 (interest only)

The majority of the non-auto debt is house maintenance (paint, windows, pool issues, garage door, etc). Since, we have no emergency fund or buffer, anytime something big crops up, it goes on credit.

If funding the emergency fund makes sense as Goal #2, my next question is, does it make sense to move all the debt to our HELOC?

I’m thinking as each 0% card expires, instead of moving it to another 0% card, I would move it to the HELOC.

In the short run, if we move every dollar to the HELOC, this can potentially free up more than $500/month to put towards our emergency fund if we pay only slightly more ($200) than the required HELOC interest ($105). Of course it is at the expense of paying more total interest in the long run.

From a purely numbers standpoint, I guess it doesn’t make much sense, but from a psychological standpoint, I’m strongly favoring this path. I also favor the simplicity of having one debt versus constantly playing the 0% credit card shuffle. A third bonus is the interest on the HELOC is tax deductible (we’re in the 25% bracket).

I calculate the extra interest expense of having everything on the HELOC at about $35/month. Correct me if I’m wrong.

So, what say you Bogleheads? Emergency fund or debt? All in on the HELOC or not?

Thanks a bunch.

p.s. I will never buy a 40+ year old house again.
guitarguy
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Re: Emergency fund or debt?

Post by guitarguy »

ScooterBog wrote: The majority of the non-auto debt is house maintenance (paint, windows, pool issues, garage door, etc). Since, we have no emergency fund or buffer, anytime something big crops up, it goes on credit.

p.s. I will never buy a 40+ year old house again.
Those don't all sound like emergencies...just sayin. My house was built in 1948 and we love it. I'd hold off on any more home improvements that aren't necessity.

Anyway...I'd take the Dave Ramsey approach and get together a $1k emergency fund to start and then crank on the debt after that. Attack the smallest balance first.
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BL
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Re: Emergency fund or debt?

Post by BL »

Sounds like you need to sell the house or go on a crash diet (spending diet, that is). You bought more than you can afford and now you have to deal with it. Cut expenses to the bone: brown bag, cut cable, phones, eating out, booze, "healthy but expensive" groceries, clothes, trips,, everything! Get a second job, sell your car, sell on Ebay, Facebook, or Craig's list, etc. This is an emergency!

Moving debt around and paying more doesn't make sense to me. I think the experience of paying them all might be a reminder to never ever get in this position ever again!

Check out Dave Ramsey. He has helped many get out of debt.
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Watty
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Re: Emergency fund or debt?

Post by Watty »

Emergency fund.

If something happens like a job layoff then you would in a bind real quick and not be able to make the next months payments. Your HELOC would likely be frozen and you would not be able to get any more credit cards, much less a zero interest credit card.

You may be in a worse bind than you realize so you will really need to cut the spending to the down to the bare minimum for a while.

If you have two cars then look at going down to just one car. You could also sell the car with the $11,000 loan balance and buy a much less expensive one.
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Utetooth
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Re: Emergency fund or debt?

Post by Utetooth »

ScooterBog wrote: So, what say you Bogleheads? Emergency fund or debt? All in on the HELOC or not?
The question of emergency fund or debt is a redundant question. The debt is the emergency.
Check out this Mr. Money Mustache post that was very helpful for me on this topic: http://www.mrmoneymustache.com/2012/04/ ... emergency/

The good news is that the balance is not astronomical and with spending cuts, discipline, and budgeting you can pay it all off in 12 months. I totally agree with the others that radical spending cuts may be needed. About a year ago I cut my cable, got on a $10/month cell phone plan (Republic Wireless), stopped eating out, started biking to work, and made every other spending cut I could think of in an effort to eradicate my debt. It has been the best thing I've ever done. I am happier, healthier, spend more quality time with my family and have a better quality of life than when I was spending 3 times as much each month.

If this sounds appealing to you read the rest of the "Classic" posts on Mr. Money Mustache. That site and along with the Bogleheads wiki and forum have revolutionized my finances and my life.

I is hard at first but totally worth it. Good luck and come back here for support whenever you need it.

P.S. To answer your question: Pay down the debt ASAP. Do not transfer all the debt to the HELCO. You don't want to pay a dime of extra interest.
"Those who understand interest earn it. Those who don't, pay it." Albert Einstein
"Be generally frugal and selectively extravagant" - White Coat Investor
Topic Author
ScooterBog
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Re: Emergency fund or debt?

Post by ScooterBog »

Thanks for the suggestions.

We don't have cable.
We cut the gym membership.
I ride my bike to work.
I don't drink.
Take my lunch to work everyday.
Haven't eaten out in a restaurant in a couple months.
Didn't buy the kids any school stuff this year.
Not having windows seemed like an emergency (four of them rotted and had gaping holes in the trim).
Garage door falling has to be taken care of.
HOA was on us about the paint peeling.
City was on us about the water line.
Etc.

Things happen. We didn't have any debt 3 years ago, then we bought this house and it's been a money pit, plus taxes and insurance have steadily increased. Moving is tough in our red-hot, HCOL market, plus the kids schools are an issue. Probably impossible to stay in the school district unless the kids share a bedroom (high schoolers).
You bought more than you can afford and now you have to deal with it.
This is the crux of the issue. Went along with the wife when house hunting, now we're both regretting it and trying to extricate ourselves.

Anyway, I hear no clear consensus, so I guess I'll do what feels best for us.
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powermega
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Re: Emergency fund or debt?

Post by powermega »

I would pay the minimum on the debt and build up the emergency plan. When the 0% promotional period runs out on each of those credit cards, pay them off with the HELOC. Pay off the car loan on schedule (minimum payments). Once you have at least 3 months of expenses saved in your emergency fund, I think you could shift some of the money to pay off more debt, including the HELOC. The after-tax rate of the HELOC is still higher than your other debts. Therefore, it would be more efficient to NOT pay off all of your debts and load of up the HELOC. That is especially true for those credit cards with the promotional interest rates. You already paid the interest rate in the form of the balance transfer fee, so it makes the most sense to pay as little on those as possible during the promotional period.
Even a stopped clock is right twice a day.
MtnTraveler
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Re: Emergency fund or debt?

Post by MtnTraveler »

So first off let me say that I "get" it. I didn't have an emergency fund for a long time and when things popped up 0% credit card offers were my friend along with cashing in stocks, savings bonds, etc. When a bunch of things happened within a short period of time I had to get creative as I depleted a lot of my stashes (hello more 0% offers and a 6.99% personal loan through my credit union). While I started an emergency fund and fund it weekly, it still seems like things pop up and then the balance is back to zero. I was looking at my roof this week and saw something that didn't look good and my anxiety rose as I don't have 2k for the insurance deductible if I need a new roof.

With all that said I'd say instead of either attacking the debt or the emergency fund, do both. You don't mention if you are able to pay more than the minimums on the debt but if you are then take that amount and divide it in half. Half goes toward the debt and the other half gets saved. Yeah, it takes longer but the first time you need to hit your emergency fund and you have enough money to cover the expense is an awesome feeling. While you do get a tax deduction on the HELOC interest it isn't anything to write home about (at least what I experienced).
Topic Author
ScooterBog
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Re: Emergency fund or debt?

Post by ScooterBog »

powermega wrote:I would pay the minimum on the debt and build up the emergency plan. When the 0% promotional period runs out on each of those credit cards, pay them off with the HELOC. Pay off the car loan on schedule (minimum payments). Once you have at least 3 months of expenses saved in your emergency fund, I think you could shift some of the money to pay off more debt, including the HELOC. The after-tax rate of the HELOC is still higher than your other debts. Therefore, it would be more efficient to NOT pay off all of your debts and load of up the HELOC. That is especially true for those credit cards with the promotional interest rates. You already paid the interest rate in the form of the balance transfer fee, so it makes the most sense to pay as little on those as possible during the promotional period.
I think I agree with this plan, although I think we are going to sell the car and get a cheaper one. Also, rather than moving the 0% cards to the HELOC when the promotional rate expires, do you think it makes more sense to transfer them to another 0% card?

Thank you for not being accusatory, pointing out past mistakes, and offering a path forward.
Topic Author
ScooterBog
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Re: Emergency fund or debt?

Post by ScooterBog »

MtnTraveler wrote:So first off let me say that I "get" it. I didn't have an emergency fund for a long time and when things popped up 0% credit card offers were my friend along with cashing in stocks, savings bonds, etc. When a bunch of things happened within a short period of time I had to get creative as I depleted a lot of my stashes (hello more 0% offers and a 6.99% personal loan through my credit union). While I started an emergency fund and fund it weekly, it still seems like things pop up and then the balance is back to zero. I was looking at my roof this week and saw something that didn't look good and my anxiety rose as I don't have 2k for the insurance deductible if I need a new roof.

With all that said I'd say instead of either attacking the debt or the emergency fund, do both. You don't mention if you are able to pay more than the minimums on the debt but if you are then take that amount and divide it in half. Half goes toward the debt and the other half gets saved. Yeah, it takes longer but the first time you need to hit your emergency fund and you have enough money to cover the expense is an awesome feeling. While you do get a tax deduction on the HELOC interest it isn't anything to write home about (at least what I experienced).
Thank you for your thoughtful reply.

We are pretty much maxed out paying the minimum on the debt. I'll see if we can squeeze a bit more. I recently stopped paying into our kids' 529s and also stopped extra payments into my work 401(k) above the minimum required. Granted, that's only $250/month but it is now redirected into cash savings. I could split that $250 between debt/savings.

I also have 2 side jobs (freelance work and sports refereeing) where all money is going into savings. I could split that as well.

Thanks again.
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Rainier
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Re: Emergency fund or debt?

Post by Rainier »

Seems like you are figuring it out and paying down the debt. Lots of good suggestions above.

My only suggestion is to reiterate selling things you don't need. eBay/craigslist
sharpjm
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Re: Emergency fund or debt?

Post by sharpjm »

ScooterBog wrote:Thank you for not being accusatory, pointing out past mistakes, and offering a path forward.
ScooterBog wrote:Not having windows seemed like an emergency (four of them rotted and had gaping holes in the trim).
Garage door falling has to be taken care of.
HOA was on us about the paint peeling.
City was on us about the water line.
Etc.
Without intending to sound accusatory, may I ask what happened with all of these items? Did an inspector miss all of the items you listed? Rotted windows doesn't happen overnight, nor does peeling paint. If an inspection missed these items it seems like you would have legal recourse here.

If you're already biking to work, skipping eating-out, 2nd/3rd job, etc, you are very much on the right course to set things straight on your own. Best of luck!
Grt2bOutdoors
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Re: Emergency fund or debt?

Post by Grt2bOutdoors »

guitarguy wrote:
ScooterBog wrote: The majority of the non-auto debt is house maintenance (paint, windows, pool issues, garage door, etc). Since, we have no emergency fund or buffer, anytime something big crops up, it goes on credit.

p.s. I will never buy a 40+ year old house again.
Those don't all sound like emergencies...just sayin. My house was built in 1948 and we love it. I'd hold off on any more home improvements that aren't necessity.

Anyway...I'd take the Dave Ramsey approach and get together a $1k emergency fund to start and then crank on the debt after that. Attack the smallest balance first.
+1. With 2 kids and a wife and zero emergency fund, I don't know how you sleep. Stop spending unless it's 100% absolutely necessary - health and welfare, the pool is not welfare or health, garage door, I can identify with that, paint - let the HOA supply you with the paint and you paint it or tell them to go scratch. What kind of HOA by-laws require painting? Sounds like bs to me.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
Rodc
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Re: Emergency fund or debt?

Post by Rodc »

Sounds like a tough spot.

I would try hard to get some sort of minimal emergency fund in place.

I would think about trying to hold on until the teens are out of high school and sell the house. (any equity?)

Best of luck.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
Topic Author
ScooterBog
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Re: Emergency fund or debt?

Post by ScooterBog »

Thanks everyone. It is a tough spot, but we put ourselves in it and I'm just looking for the best way out. We do have about $120K equity in the house, so selling is certainly on the table if we can figure out the school thing.

And yes, the inspector did miss some of those items. I asked about the windows at the time, it was obvious they were rotting, and he just dismissed it and said it was cosmetic. I should have pushed it but didn't.

Anyway, to recap, I think we will
1. Build up a minimum emergency fund so I can sleep at night
2. Once #1 is accomplished, get aggressive on debt

In the meantime:
1. Keep paying minimum on 0% cards
2. Not move the debt to the HELOC
3. Get a less expensive car
4. Continue to look for ways to reduce expenses elsewhere
5. Move the f*** out of this house
MtnTraveler
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Re: Emergency fund or debt?

Post by MtnTraveler »

Sounds like you are seeing a way to attack things. One thing I wanted to mention is that since you have recently put a decent amount of money into the house since buying it, you might have finally hit the repair plateau with it. Granted you never know till more time has passed but you might be into the normal maintenance mode. I had an inspector who was pretty much off on everything he said would be a worry in a few years (everything turned out urgent) and a seller who lied on the disclosures. After the initial years of repairs, the money pit started to just become a normal house. After 13 yrs I don't think I've dealt with anything that is that far out of the norm anymore. So glad I didn't sell within the first two years (trust me it was extremely tempting to cut my losses).
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