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Isn’t personal finance exciting? I know, I know, it really is, and sometimes I can hardly contain myself. On Friday, I wrote a fun little piece called “Question Of The Week: Should I Pay Down My Student Loans ?“, and I got some great responses and answers from my awesome readers. As I was responding to the various comments and suggestion, I saw a common thread weave throughout, which was to obviously “PAY DOWN THE FLIPPIN’ LOAN!” The other one was a bit more interesting, and I’d like to explore it a bit further.
Why Do I Have So Much Cash Saved Up?
I got a few responses from readers asking why I have so much money saved up when I am still in debt and paying 6% interest on that debt. It’s a fair question, and I think Emily from Evolving PF had a response sums up the concerns of those readers the best: “Wait wait wait are you saying $6,100 is a SMALL emergency fund? While you’re in debt? And have other cash and accessible investments? I must have been listening to too much Dave Ramsey because I have no idea why you are keeping so much cash around while you still have these student loans!”
Now, if you’re not familiar with the Dave Ramsey 7 steps to financial freedom, here they are:
- Save up a $1,000 emergency fund
- Pay off ALL consumer debt
- Save up 3 – 6 months’ expenses emergency fund
- Invest 15% gross pay into retirement accounts
- Max out college fund accounts for kids
- Pay off mortgage early
- Give generously, live freely
That’s sort of a paraphrase, but you get the idea. Based on this plan, Emily is correct in saying that $6,100 is FAR TOO MUCH cash money to have on hand doing NOTHING when I am paying 6% interest on my $13,700 in student loans. Not only that, but I have another $3,000 just sitting there, waiting to pay on the loans. But, before I can tell you why $6,100 isn’t very much, I have to tell you WHY I have an emergency fund, and why I think $1,000 is totally inadequate for someone in my situation.
Why Do I Have An Emergency Fund?
When Michelle and I first got married, we were ready to kick butt. And we did, because we’re awesome like that. We paid off a bunch of debt while earning only $14 an hour, and were on our way to becoming debt free. We redirected our priorities, bought a house, had a kid, and my wife is now a stay-at-home mother to our sweet boy. That was a lot of change in just 3 years, and being the conservative saver that I am, I put away as much cash as possible to make sure we were covered in case of emergency.
Now, we’re on a tight budget, but are getting by and enjoying life. We keep it frugal, scoring awesome deals where we can, keep our food budget low, and don’t have many luxuries outside of our home. Even with all of that, if I ever lost my job, things would come to a screeching halt, and suddenly we’d have a HUGE emergency on our hands. $1,000 would not last long, and we’d have to stop paying our mortgage, among other things, and would end up in a tough place VERY QUICKLY! I like to have a MINIMUM 3 month’s saved up, and that $6,100 doesn’t even cover it, so I would say that our emergency fund is SMALL for someone in my situation.
In the Dave Ramsey plan above (which I do like a LOT), he assumes you save your emergency fund, your pay off your debt, you save 3- 6 months’ expenses, THEN you buy a home. It’s not listed there, but having listened to his radio show a TON back in the day, he would always state this to people looking to buy a home. Since the 3 – 6 month emergency fund comes BEFORE the house, I’d say it is a REQUIREMENT to have when you are a homeowner, especially in a single-income household! Job loss or anything else cutting off your income for a few months at a time would absolutely CRUSH you, causing you to borrow or just stop making payments to get by.
What Am I Going To Do?
So, we’ve establish that I have a $6,100 emergency fund in cash, and another $11,000 in a Roth IRA (that I DON’T want to touch). I also have $3,000 in a savings account leftover from tax season earnings that I COULD throw at the student loans. Also, I will be selling a car soon for another $2,000 (this is a new development). But, for those of you that didn’t read my post yesterday, I also dropped this amazing bombshell:
So, now what? Well, here’s what I am going to do. Today, I am going to send $3,000 toward my highest interest loans (6.8%). Done and done! Next, I am going to sell the car and put $2,000 into an account for Baby #2! WOOHOO! That is for out-of-pocket medical and other baby expenses (we paid a bit less than this last time, but just in case). Then I am going to keep rocking my budget, my side hustles, and look for any extra money each month to throw at these loans. I set a VERY aggressive goal at the beginning of the year to pay off the loans, and I still want to hit it. Sure, I need to find hundreds of extra dollars each month to make this happen, but I am motivated, and thanks to ya’ll, I’m taking a HUGE chunk out of these dang loans RIGHT NOW! So thank you, and look for updates as I tackle these dang loans to the ground. They used to look like a mountain, and now are looking like a day hike. Now, let’s see how well I can plow through the rest of it!
Edit: Quick update for everyone that’s curious. I made the payment. $3,000 will VANISH from my checking account today or tomorrow. WOOOHOOO!!!
Comments: So, what do you think? Is my emergency fund too big, just right, or too small? Do you think I should be dropping the $3,000 on the loan today? Welp, too late on that one, lol! For you homeowners out there, how big is your emergency fund? Are you still in debt? I’d love to hear your stories and why your fund is the size that you have it at. Plus, does anyone know if baseball cards count as emergency savings? I’ve got over 8,000 sitting in the garage. Maybe I’m richer that I think??