Emergency Fund vs. Debt Paydown

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nebraskaguy85
Posts: 6
Joined: Thu Jun 25, 2020 6:59 pm

Emergency Fund vs. Debt Paydown

Post by nebraskaguy85 »

I’m 35 year old divorced males with 3 year old son.

Income: 70-75k
Debt: 26k Student Loans, $15k high interest credit card/personal loan debts.

$6k emergency fund at CIT bank.

I inherited the $15k debt in divorce settlement, it’s debt I was unaware my ex spouse was taking out.

With online savings account rates dropping, would it be smart to keep $1k in savings, and use the other $5k toward debt repayment?

Should I aggressively pay down debt or balance that with putting some money in savings every month?

My career is stable and opportunity in the next 3-5 years to move into ownership.

I want to set myself and my son up for success moving forward.

Any advice or opinions is welcomed, I appreciate your time and effort.

Thanks
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anon_investor
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Re: Emergency Fund vs. Debt Paydown

Post by anon_investor »

nebraskaguy85 wrote: Mon Sep 07, 2020 10:44 am I’m 35 year old divorced males with 3 year old son.

Income: 70-75k
Debt: 26k Student Loans, $15k high interest credit card/personal loan debts.

$6k emergency fund at CIT bank.

I inherited the $15k debt in divorce settlement, it’s debt I was unaware my ex spouse was taking out.

With online savings account rates dropping, would it be smart to keep $1k in savings, and use the other $5k toward debt repayment?

Should I aggressively pay down debt or balance that with putting some money in savings every month?

My career is stable and opportunity in the next 3-5 years to move into ownership.

I want to set myself and my son up for success moving forward.

Any advice or opinions is welcomed, I appreciate your time and effort.

Thanks
Your plan is sound. Kill that CC debt! Good luck.
lazynovice
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Re: Emergency Fund vs. Debt Paydown

Post by lazynovice »

How many months’ expenses would $1k represent?

I’d recommend keeping the EF at the $6k assuming it is about 3 months of expenses and paying down the credit card debt with earnings next. I am also assuming the personal debt is higher rate debt than the student loan.
Mike Scott
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Re: Emergency Fund vs. Debt Paydown

Post by Mike Scott »

Check out the Dave Ramsey steps for getting rid of debt. That 15K needs to go away asap. If you could do that in a year or less you can move on with less financial baggage.
lazynovice
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Re: Emergency Fund vs. Debt Paydown

Post by lazynovice »

Are you able to do a balance transfer of the personal loan to a credit card that offers 0% on transfers?
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FiveK
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Re: Emergency Fund vs. Debt Paydown

Post by FiveK »

See Investment Order for some suggestions.

Depending on the CC interest rate, it might qualify as an "emergency" and justify the use of the e-fund.
Topic Author
nebraskaguy85
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Joined: Thu Jun 25, 2020 6:59 pm

Re: Emergency Fund vs. Debt Paydown

Post by nebraskaguy85 »

The 6k emergency fund represents roughly 2-2.5 months expenses. I’m rebuilding my credit, so balance transfer to a 0% credit card is not an option I don’t think.

What are the 3-5 steps I need to take to move forward financially from my divorce?

I’d like to be in a position to buy a home in 3-5 years, be debt free other than mortgage.

When I look at my situation I feel like the hole is so big and feel defeated. I want to start moving in the right direction and not pay attention to the outside noise of what peers are doing. I look at my peers and see them doing so much better on the surface.

Thanks for your time.
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FiveK
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Re: Emergency Fund vs. Debt Paydown

Post by FiveK »

nebraskaguy85 wrote: Mon Sep 07, 2020 11:09 am What are the 3-5 steps I need to take to move forward financially from my divorce?
How do you see the steps in the "Investment Order" post applying to your situation?
Topic Author
nebraskaguy85
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Re: Emergency Fund vs. Debt Paydown

Post by nebraskaguy85 »

I think the thing I’m struggling with is being newly divorced and I’m not sure if I should keep extra cash on hand knowing my son has needs with his care that sometimes incur extra expenses.

I’m contributing to get 3% match in 401k, my employer also contributes additional 7% profit sharing.
Lee_WSP
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Re: Emergency Fund vs. Debt Paydown

Post by Lee_WSP »

Are you willing to post the breakdown of the CC debts by amount & interest rate?

If it's all one lump sum, mathematically speaking, paying off the credit card debt with the 5k will net you the largest expected return. However, life happens and you could be put in a worse spot if an emergency comes up and you don't have the liquidity necessary to handle it.

Psychologically speaking, knocking out one of those CC debts in one fell swoop is pretty liberating.
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FiveK
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Re: Emergency Fund vs. Debt Paydown

Post by FiveK »

nebraskaguy85 wrote: Mon Sep 07, 2020 11:21 am I think the thing I’m struggling with is being newly divorced and I’m not sure if I should keep extra cash on hand knowing my son has needs with his care that sometimes incur extra expenses.

I’m contributing to get 3% match in 401k, my employer also contributes additional 7% profit sharing.
Good choice on getting the match - that beats CC interest.

If you could use a credit card to pay for your son's care if it becomes needed, then you might as well pay down the CC debt now instead of holding cash "in case...".
terran
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Re: Emergency Fund vs. Debt Paydown

Post by terran »

I'm generally a proponent of big emergency funds, but I would absolutely limit it to $1000 until high interest credit card debt is paid off. Getting the match on your 401(k) is also a good idea. What to do about the student loans would depend on the interest rate. You make almost twice what you spend, so you should be able to pay off your debt pretty quick.
lazynovice
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Re: Emergency Fund vs. Debt Paydown

Post by lazynovice »

I’ve already weighed in so recognize this is a second vote. But trying to answer the 3-5 steps...

Read the wiki here and make a plan. Having a plan you developed on your own is a big step. When you understand why you are doing something, it helps to stick with it.

I would keep the 6k EF, if it were me. We are in a crappy economy and you have a 3 year old.

Figure out what you need to do to rebuild your credit. Make your payments on time. Be diligent. Don’t incur new debt until you have gotten rid of the old.

Pay down the non-student loan debt as quickly as you can. If you have motorcycles, jet skis or any of those toys, sell them and pay it down.

Be a good employee and do what you can to earn your way out. Look for promotions, or a new job when you can. Sock away the raises to start a down payment fund.

I’ll stop at 5.
babystep
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Re: Emergency Fund vs. Debt Paydown

Post by babystep »

nebraskaguy85 wrote: Mon Sep 07, 2020 10:44 am I’m 35 year old divorced males with 3 year old son.

Income: 70-75k
Debt: 26k Student Loans, $15k high interest credit card/personal loan debts.

$6k emergency fund at CIT bank.

I inherited the $15k debt in divorce settlement, it’s debt I was unaware my ex spouse was taking out.

With online savings account rates dropping, would it be smart to keep $1k in savings, and use the other $5k toward debt repayment?

Should I aggressively pay down debt or balance that with putting some money in savings every month?

My career is stable and opportunity in the next 3-5 years to move into ownership.


I want to set myself and my son up for success moving forward.

Any advice or opinions is welcomed, I appreciate your time and effort.

Thanks
I would pay it down aggressively. I would put all of the 6k and reduce the interest charges. Anything else you can do to reduce the interest rate?
babystep
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Re: Emergency Fund vs. Debt Paydown

Post by babystep »

nebraskaguy85 wrote: Mon Sep 07, 2020 11:21 am I think the thing I’m struggling with is being newly divorced and I’m not sure if I should keep extra cash on hand knowing my son has needs with his care that sometimes incur extra expenses.

I’m contributing to get 3% match in 401k, my employer also contributes additional 7% profit sharing.
Aha 401k. What are the interest rates on the two debts? Any way to get the loan on 401k to pay-off the high-interest rate. This can be a good idea if the interest rate is very high like 10-20% and you have a good balance like 30k+ in 401k.
yules
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Re: Emergency Fund vs. Debt Paydown

Post by yules »

nebraskaguy85 wrote: Mon Sep 07, 2020 10:44 am I’m 35 year old divorced males with 3 year old son.

Income: 70-75k
Debt: 26k Student Loans, $15k high interest credit card/personal loan debts.

$6k emergency fund at CIT bank.

I inherited the $15k debt in divorce settlement, it’s debt I was unaware my ex spouse was taking out.

With online savings account rates dropping, would it be smart to keep $1k in savings, and use the other $5k toward debt repayment?

Should I aggressively pay down debt or balance that with putting some money in savings every month?

My career is stable and opportunity in the next 3-5 years to move into ownership.

I want to set myself and my son up for success moving forward.

Any advice or opinions is welcomed, I appreciate your time and effort.

Thanks
Are you.super sure that your job/career are stable? If so, pay down that high interest credit card debt. Because:
(1) if you don't have an emergency, you have paid off high interest debt!
(2) if you do have an emergency, you can pay for it with your credit card, which takes you back to the starting point anyway.

I would not recommend this for everyone, just you as long as you are super sure that your job/career is stable.

Yules
bltn
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Re: Emergency Fund vs. Debt Paydown

Post by bltn »

This is a very strange economy, and is liable to be bad for a long time.

With the responsibility of a 3 yo son, I d keep my current emergency fund, and throw my savings at the credit card debt. I d try to pay it off in a year.
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gr7070
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Re: Emergency Fund vs. Debt Paydown

Post by gr7070 »

It sounds like you have a child with some special needs that may incur unexpected costs. If so, keep the EF where it's at and then aggressively pay down debt.

Focus on long-term future.

Get on a budget.

Pay off all debt. Then increase retirement saving to 15% minimum. Save up 6 month EF. Save up house down payment.

Get term life insurance. Do you need greater cost and term than typical for your child if special needs exist?

Change/make will: to stipulate who takes care of child if mom is deceased.

Change beneficiary from ex.

*Focus on parenting*. Then career. Keep child away from your future relationships until marriage is imminent.
sport
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Re: Emergency Fund vs. Debt Paydown

Post by sport »

If you still have the credit card(s) with the 15K balance, do not make any new charges on those cards. You will pay interest on the new charges starting with the day of the charge. If you use a credit card, use a different one with no balance and pay it off in full each month. That will avoid paying interest on new purchases.
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galawdawg
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Re: Emergency Fund vs. Debt Paydown

Post by galawdawg »

Here's my take on the situation and a recommendation:

1. Your $6k emergency fund is not sufficient in itself to pay your high interest debt in full.
2. You indicate that $6k represents two to two and a half months of expenses, so your expenses are about $2,500-$3,000 per month.
3. You earn about $6,000 per month.

Based upon that, I'd recommend that you keep your emergency fund as is. Don't use that to pay debt. Instead, put all of your extra monthly income towards the high interest debt. You should be able to pay it off in six to nine months. If you can trim any expenses to pay it off sooner, even better.

Once you have paid off the high interest debt, next bump up your emergency fund to three to six months of expenses. Once those two things have been done, then invest for future goals for you and your son.

Good luck!
retiredjg
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Re: Emergency Fund vs. Debt Paydown

Post by retiredjg »

nebraskaguy85 wrote: Mon Sep 07, 2020 10:44 am With online savings account rates dropping, would it be smart to keep $1k in savings, and use the other $5k toward debt repayment?
If you were 23 with no dependents, this would be risky but reasonable.

With a kid, I think it would be reckless. $6k is not much of an emergency fund in the first place. Having an inadequate emergency fund might put you into more credit card debt. Dropping the EF lower is not wise.

Keep investing enough to get the match at work. With everything else, attack the credit card debt aggressively and move on. It will be gone before you know it.
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willthrill81
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Re: Emergency Fund vs. Debt Paydown

Post by willthrill81 »

FiveK wrote: Mon Sep 07, 2020 10:59 am Depending on the CC interest rate, it might qualify as an "emergency" and justify the use of the e-fund.
It almost certainly will unless it's a super low intro rate.

Speaking of which, the OP might do well to open a card with a 0% intro rate, which will generally last for more than 12 months, transfer the existing balance to the new card, and pay the 3% balance transfer fee. That will very likely save significant interest expense.
retiredjg wrote: Tue Sep 08, 2020 10:39 amWith a kid, I think it would be reckless. $6k is not much of an emergency fund in the first place. Having an inadequate emergency fund might put you into more credit card debt. Dropping the EF lower is not wise.
This makes no sense at all. $1k might indeed be all the OP needs to pay for essential monthly expenses.

But beyond that, if the OP didn't have an EF, nobody here would recommend taking out a 15-25% interest loan to get one. By holding on to the $5k and the credit card debt, that's precisely what the OP is doing.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
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