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7 Reasons We Decided to Use the Emergency Fund to Pay Off Debt

As I mentioned about a week ago, Mr. BFS and I paid off his car.  Yay!

Well, we made the last payment of $4600 by using our emergency fund.  In fact, the entire last $7500 came from that account.  I’ve had a couple of people seriously wonder about our mental health since we’ve also had to raid our cash for dental expenses, vet bills, a major vacation, and grad school payments.  This means we went from having more than $20,000 in cash to about $4500 in cash in less than 2 months.

Here’s how we justified the risk:

1)  Mr. BFS just signed a one year contract with his new school district as a librarian.  He’s guaranteed the job for at least one year making more than he does now as long as nothing really awful happens (he’d have to beat a kid or something to be let go before June 2011).

2)  My job is stable too. My department has shrunk to TWO people due to transfers out, but we are one of the few departments in the company that bring in more than we cost 100% of the time.  As long as our car dealership customers need forms, I’m safe.

3)  The $4500 we have left is enough to cover almost a month and a half of normal expenses or 2 months of the bare minimum.  Plus, it wouldn’t need to be touched unless we both lose our jobs since we can live off of one of our incomes – granted, we’d live better off of hubby’s than mine.  🙂

4)  It will take us much less than a year to be back to normal. Since we do live off of one income and only have the $740 a month mortgage debt left, we will be able to sock away the $15,000 in no more than 8 months (probably more like 6-7).

5)  The 4.6% interest car loan was a better return on our money to pay off than the 2.15% we were making at Smarty Pig or the 1.1% interest at ING.

6)  If we do run into major problems, we have backup – more than $16,000 in stocks, $15,000 in a Roth IRA we could withdraw without any penalties, at least $30,000 in home equity, and if we’re dying from hunger or something, more than $50,000 available on our credit cards (but it would be hard for me to accept 12-13% interest rates).

7)  It feels great to only have a mortgage left and we’ll even be able to knock that off faster than originally planned.  We were on track to pay off our 2007 mortgage by 2018, but that will probably end up being 2015-2016 at the latest.

Is using an emergency fund to pay off “low interest” debt a good idea for everyone?  No.  If you are not in a stable job, have major expenses pop up on a regular basis, or have dependents that solely rely on you, I’d suggest you keep at least a solid 6 month emergency fund on hand at all times.  It’s safer and smarter.

For us, I think it was a good choice.  I promise to keep you updated if this comes back to bite us in the butt somehow.  🙂

Have any of you raided your cash to pay off a debt?  How did that turn out?  Any major successes or horror stories out there?

FYI:  I worked at a dead end cubicle job from 2005-2011 for about $30,000 per year.  I went self-employed in July 2011 and make between $70,000-$90,000 through blogging, professional pet sitting, hubby's reffing, and our rental home.  If you’d like to start your own site (link to my free step-by-step guide), I highly suggest checking out Bluehost (my referral link with a nice discount for you, PLUS a free custom header banner from me!).  Please contact me any time at budgetingfunstuff*at*gmail*dot*com with questions or just to brainstorm! I’d love to help!
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43 thoughts on “7 Reasons We Decided to Use the Emergency Fund to Pay Off Debt

  1. During the school year I generally only keep one month’s expenses in cash, unless online savings has a high interest rate. If we have a bigger emergency than that I can raid longer-term savings (stocks, cds). Since our fixed expenses are well under half our income, the credit card float will keep us alive without paying interest until we get our next paychecks which can be used to replenish the one month emergency fund if need be.

    During the unpaid summer months when we’re not paid I keep something like 2-5 months of income in cash (more at the beginning, less at the end). Just in case.

  2. Nicole, that seems like a solid system. Now I don’t feel so bad that we do similar…stability allows for less sedentary cash. 🙂

    I think we’ll build back up to a $10,000 emergency fund, which will be enough to cover both of our high deductible health care plans at the same time or more than 3 months of our normal living expenses.

    Thanks for your input!

  3. Congratulations on reducing your debt! I think you made a great decision given your stable employment and the fact you do have other investments that could be tapped in case of emergency.

    I personally feel more security being debt free than a little low in the emergency fund!

  4. Everyday Tips, thank you for helping me decide. I was a little scared at first since our cash on hand fell to about $4000 in less than a week, but it really hasn’t effected anything. Plus, we’re now back over $6000 so it’s easy to see that we’ll build back up our cash pretty fast. So again, thanks!

  5. With that out of the way, you’ll be saving just that much more. It’s nice having that money growing in the account. 🙂 And the more you have in it, the more you want to see is double, and more. WTGo.

  6. ODWO, thanks! I do see myself becoming a mortgage-payoff zealot soon, but thankfully Mr. BFS is jumping on the debt-free bandwagon as well.

    We were talking about the 4 extra paychecks a year that we’ll be getting between his job and my job because of biweekly pay periods, and he actually said, “We should use like half of those to pay off the house faster. Then we can invest a quarter of it and play with a quarter of it.”

    I am SO happy! Usually I’m pushing for something like that and I get “Are you sure we aren’t saving too much?”.

    He’s coming over to the dark side…

  7. WOWWWW!!! That sounds SOOO exhilirating and freeing! I definitely think you made the right decision. An emergency fund is for emergencies. Since there are no foreseeable emergencies in your immediate future that you can’t cover until you rebuild the fund….why not? I am so excited for you and your family!

  8. I generally prefer to pay off my debts rather than keep cash lying around at a low return! The way I see it, if there are truly any emergencies, I can always choose to use my line of credit or credit card at that point. In the meantime, I can save on interest by paying off the debt!

    Besides, you have plenty of credit available and you still have a few K in cash. I think your decision was fine.

  9. My emergency fund tends to be way too big…just happens, believe it or not. $4500 seems to be plenty for your situation.

    Didn’t you mention that your mortgage rate was higher than your car rate?

    We paid off our mortgage early–we figure it as part of our “fixed income” holdings.

    Debt-free is a wonderful feeling. My son keeps saying “Thank you!” because he has no student debt.

  10. frugalscholar, our $4500 has turned into about $6000 in the last 9 days, so we should be fine just like you said, lol.

    Yes, our mortgage rate is 5.375% and our car was only 4.6%, but I hate car debt more (paying interest for something that has such a short life comparably ticks me off). We also have overpaid our mortgage since we got in 2007…it’s set to be paid off in 10 years total or less.

    I think your son is spot on, thanks for making his life so much easier!

  11. Mike, no, we don’t escrow. Our property taxes have been about $2200 a year and our homeowner’s insurance is about $800 a year, so I put $300 a month aside for all of that. The extra pads the next year in case they re-appraise our house now that we aren’t in a high foreclosure area anymore. 🙂

  12. Great post! I love this considering I was about to pay off one of my student loans with my savings (however i decided to go ahead and start saving for a house instead). Sounds like you have a perfectly acceptable reason to use it to me! More power to ya!

  13. You’re a better person than I am. I paid off my debts before doing an emergency fund. I know it’s a more risky option, but I really didn’t trust myself with the money just lying around.

    Woo Hoo. Great decision.

  14. We paid off my wife’s car in 15 months! It was tight at first but we recooped by the 5th or 6th month.

    I still don’t have a true Emergency Fund, all my excess money goes into investments a few times each year.

    I guess in a way, I consider my Roth IRA my emergency fund. It’s nice to be able to withdrawal the contributions made, tax and penalty free! 🙂

  15. myfinancialobjectives, a house is a great reason NOT to use your cash on hand. 🙂 Thanks for your words of encouragement!

    Sandy L, hey, you know yourself best. That was a great decision for you. I have to have at least a small security blanket or I can’t sleep. I love the “personal” in personal finance!

    Money Reasons, I like having the Roth IRA as a backup for my backup, but I never want to be forced to cash out of our equities…bad timing could cause us to lose all of our profits in one go. Plus, we can’t pay our Roth IRA back…that would suck for our early retirement plans. 🙂

  16. Congrats! We made that same decision (not for the car we still have that…but for CCs) like a year ago. It is shocking but feels GREAT when you start building it back up

  17. Hey Crystal–

    Congratulations! We are getting ready to (almost) zero out our own emergency fund in order to get rid of the rest of my student loan debts (hurrah!). Our car was paid off in June (double hurrah!!), and then we will just have the mortgage.

    We do have a large expense that just popped up…but more on that later:).

  18. You did it right! I like to challenge people with a “reverse question” which often makes the decision obvious. In your case the question is, “If you had zero debt and a $4500 emergency fund, would you borrow money to build your emergency fund up to $20,000?” Of course not.

    Congrats on getting your debts paid off. Now you can use your new cash flow to rebuild that EF.

  19. Awesome!! It just feels so great to no longer be a “slave to the lender.” Congrats on your hard work.

    Just an FYI, with your house payoff plan, there are some great interest rates out there. I know ING has a good program with rates around 3.5 percent, and we even looked into a 7/1 adjustable rate at a bank that was also at 3.5 percent. I know adjustable rates can seem scary, but if you make sure the terms are reasonable, they may be able to save you a lot of money in interest.

  20. Evan, congrats to paying off your cc’s!!! Yep, we’ve already socked away most of our last 3 paychecks, so I feel much better and am enjoying watching our cash grow so quickly!

  21. Financial Samurai, that is the plan. That extra $330 a month is quite a bit when you think about the fact that it is about 1/3 of one of my paychecks. 🙂

    Amanda, early congrats on being almost debt free! Now I am intrigued about your big expense…nice marketing technique!

  22. Joe, nice wording, your comment has been liberated. 🙂

    Yep, we’re rebuilding our cash accounts and then opening a 2nd Roth IRA…if we have any left after that, we’ll increase our mortgage overpayments some more. 🙂

  23. AJ, thanks! I’ve looked into refinancing, but the closing costs eat our savings. Closing costs in Texas for our home seem to be $3000-$4500 depending on the title company we could use and we’d only be saving about $4000, so we’ve moved on. With about 6 years left to go, we seem to have gone beyond the we-could-save-a-bunch-by-refinancing point…oh well, 6 years or less to complete debt freedom! 🙂

  24. Nicole, I didn’t call many people. I tried some bank in South Carolina I saw online, Sun Trust, and Chase and decided it wouldn’t be worth any more time. The guy I spoke to in SC said that Texas had some of the highest closing costs in the nation. 🙁

  25. The guy in SC was not telling you the truth. Maybe he was at the time if this was still during the housing boom in the rest of the country, since TX put in a bunch of rules in the 1980s (during their housing bust) so that people couldn’t do all the shady things that were happening say, in California.

    I think my friend at UTD just paid something like 2K for a refinance on a 30 year mortgage. Dallas isn’t that far from Houston, right? I also had a friend in Houston who was always getting no-cost refinances through Wells Fargo. (We lost touch after she had her third kid about 3 years ago). She was down to like 5% which was really low at the time.

  26. Nicole, well, I don’t know if he knew if he was wrong or not, but this was only 7 months ago. I’m contacting Wells Fargo right now.

    And yes, Dallas is close-ish – about 4 hours up Interstate 45 North. We visit friends there once in a while.

  27. Nicole, thanks for the tip!

    We could save about $2000 total through Wells Fargo, but the closing costs would still be $3450 ($2750 plus $700 for a 1% loan origination fee). We may not do it simply since we have no emergency fund right now since we paid off the car and hubby is uncomfortable with using the spread out cash we do have for a $2000 gain over 6 years.

    I think we’d be fine since we’ll have about $9000 in cash by the end of the month – it’s just spread out between checking account padding, vacation account, fun money, and all of the target accounts (emergency fund, pets, taxes, etc).

    But, you were right. Wells Fargo had the lowest rate. The closing costs would have been less if we already had our mortgage through WF, which is probably why your friend had no issues.

    Thanks again!

  28. That’s too bad about the refinancing costs in Texas! Bummer! We are refinancing in PA, and it will cost us less than 1,500, which will allow us to see savings after about 18 months on our mortgage (so it’s worth it). However, with only 6 years left to pay off that house, you don’t even need to worry about a little interest rate savings!!

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