Emergency Fund vs. Debt Repayment

This week marks a big accomplishment for me – I have reached my second emergency fund (EF) goal of $3k, after a year and a half of saving.

I had initially saved just $1k, which is thought to be the minimum EF when paying off debt. But, since my life feels very much in flux, I decided to modify my goal and aim for $3k.

My approach was simple: take 4% of my take-home pay in 2017-2018, bump it to 5% in 2019, and make a transfer from savings to checking each pay day (usually pre-scheduled to go through on pay day, so there were no excuses). Then, each time I reached $500, I sent a check to my high-yield savings account. I also added a bit of extra savings that I had thanks to my side hustles, until I reached $3k.

Here’s why I chose to save instead of solely paying down debt:

  1. It lessens the possibility of going into debt due to unplanned expenses outside of my budget and sinking funds, such as:
    • an emergency vet visit
    • a family emergency, which might entail a last-minute plane ticket
    • an unexpected car repair
    • emergency medical bill(s) (my health insurance is terrible)
  2. It makes me feel more secure – it is there if I need it, but sufficiently far away for me to not spend it unless necessary.
  3. It’s parked in a high interest savings account that garners me a 2.25% interest rate – 2018 was, in fact, the first year I received a 1099-INT, and the free money that grows from savings feels *good.*
  4. I’m already paying down debt. In fact, I regularly throw 35-45% of my take home pay towards my debt. But my debt level is so high (nearly twice my income) that it will be years before I pay it off, and the likelihood of *something* going wrong in that time is relatively high, I feel. Again, the EF makes me feel more secure. To live paycheck-to-paycheck for the next five years (estimated time to pay off my debt) seems unwise.
  5. I am a limited-term employee. My contract ends in June and in the worst case scenario that I cannot find another job before then, my emergency fund plus my paid PTO will see me through about 2 months.

This is my list, but there are lots of other resources out there about why you need an emergency fund (here, here, and here as well)  – and most would agree that you should save 3-6 months’ living expenses. But that would take a long time on a limited salary (several years), and so this (a goal of $3k) seemed a better option for me.

What’s next? There’s a part of me that wants to aim for $4k, but I think for at least the next couple of months, I’ll funnel my 5% into my sinking funds, build those up a little more (especially since my Very Expensive Feline needs some serious dental work), and then think about how I can add some additional debt repayment to the mix.

(all of the links here are articles I found helpful when researching what an emergency fund is and how I could build one)

2 thoughts on “Emergency Fund vs. Debt Repayment”

  1. Congratulations! That’s amazing news.

    It’s a tough choice, isn’t it? Last year, I spent ridiculous amounts of time trying to figure out whether we should prioritize saving or debt repayment. We mostly chose debt repayment, and now I’m kind of regretting that. I mean, yeah, if you’re in a reliable job you love and if you have great insurance, I can see throwing every extra cent to debt. But if you’re not happy in your job, or if your job doesn’t offer much security, then a well-stocked e-fund is particularly important. At this point, we’re focusing on saving (but we hope to ramp up debt repayment later this year).

    Liked by 1 person

    1. Yes! And I remember you blogging about the back-and-forth decision-making that went into that. I think it’s actually a good thing to be able to say this works *at that time* and then change your mind later. You may not be able to predict how you feel about your job now, but the time you spent paying back that debt back then means that much less debt as you move forward.


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