Using Emergency Fund to pay off loan

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rbslos36
Posts: 20
Joined: Sat Jan 05, 2013 10:56 pm

Using Emergency Fund to pay off loan

Post by rbslos36 » Sat Feb 17, 2018 7:07 pm

I have an emergency savings account with a year of my salary. It pays 1.5%. Should I use 2/3 of this money to pay off a home equity loan which is 3.25%? With the tax changes, I will no longer be able to deduct the interest. The loan is $90,000 and is the only debt we have.

Thanks for your advice.
RB

mega317
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Joined: Tue Apr 19, 2016 10:55 am

Re: Using Emergency Fund to pay off loan

Post by mega317 » Sat Feb 17, 2018 7:20 pm

A year of salary is (hopefully!) more than a year of expenses which is a rather conservative emergency fund, not knowing your circumstances.

How much emergency fund would be left, as an multiple of monthly expenses? And would you be comfortable with that?

mortfree
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Re: Using Emergency Fund to pay off loan

Post by mortfree » Sat Feb 17, 2018 7:27 pm

I would put 45k towards it and let the reality sink in. You will reduce the monthly interest amount enough that carrying the balance won’t be as “expensive “.

45k could be any number of your choosing but you get the idea.

You could even do 3 payments of 30k or so. March, June, September or whatever stretch of time or dollar amount you prefer. Make the required payments during the other months.

Many choices.

This is all assuming you are meeting the other financial goals for retirement savings and any other short/long term goals.

headingboogle
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Joined: Fri Aug 18, 2017 9:22 am

Re: Using Emergency Fund to pay off loan

Post by headingboogle » Sat Feb 17, 2018 8:28 pm

Once I used my emergency fund to pay off a vehicle loan. Sure enough once it was paid off I had two larger things that needed to be fixed unexpectedly for the house.

Just make sure you have enough left over so you’re not sweating bullets until you build it back again. I hate having debt but I also hate not having an adequate emergency fund!

TheAncientOne
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Joined: Wed Jul 19, 2017 8:53 pm

Re: Using Emergency Fund to pay off loan

Post by TheAncientOne » Sat Feb 17, 2018 8:46 pm

Paying off the home equity loan will bring your emergency fund down to $45K, or four months' salary if I understand you correctly. Unless you have special circumstances, this would seem to be a more than adequate reserve, which you can now rebuild with the money that's no longer going toward the home equity loan.

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whodidntante
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Re: Using Emergency Fund to pay off loan

Post by whodidntante » Sat Feb 17, 2018 8:50 pm

3.25% is still pretty cheap. I wouldn't get excited about paying it down. But consider investing some of that "emergency fund." A year of salary is excessive for most people.

Hillview
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Re: Using Emergency Fund to pay off loan

Post by Hillview » Sat Feb 17, 2018 8:53 pm

It really depends on the potential need for the emergency fund. For us we keep a year of bare-bones expenses in EF. If I lose my job we live off that -- and the older / more exec level you get the harder it can be to get a new job fast. My husband isn't drawing a salary right now so we would be very unlikely to put that money into a loan. 2 years ago we were both drawing a salary and sure we could spend out EF and then re-save it. What is the scenario you are looking at for your EF needs? Also is 135k a year of total stripped down expenses or just what you are spending now -- there is a difference IMO.

JBTX
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Re: Using Emergency Fund to pay off loan

Post by JBTX » Sat Feb 17, 2018 9:16 pm

impossible to say without knowing more. Have you maxed out all retirement accounts opporuntities? Do you have a taxable savings account? Will you be having any significant expenditures coming up in a few years? No idea how old you are.

Without knowing any of those things, perhaps I would start paying extra, and paying it off at an accelerated rate.

Also or alternatively, I'd probably put $10k for you and $10k per spouse each year( you said "we") in ibonds. They are yielding about 2.6%, and the tax is deferred until you take it out. That way you really aren't losing too much.

https://www.treasurydirect.gov/indiv/re ... dterms.htm

We keep around 6 months expenses in cash, but another 6-8 months in ibonds. In theory, we could reduce our 3.25% mortgage, but we choose to keep up the liquidity, because we have some significant expenses coming up in the next few years.

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