E-fund of the Future

Right now over at the Simple Dollar there are some questions about Dave Ramsey’s assertion that you should stop your Emergency Fund at \$1,000 – then pay off all your debt – and then build up the E-fund to 3-6 months worth of expenses.

I’ve actually thought quite a bit about what I want to do with the money that is going to my Emergency Fund once I reach my target goal of \$1,200.

My gut tells me that stopping saving all together is a bad idea. \$1,200 isn’t that much money. I could continue at the same savings pace and get to \$2,400 by the end of 2010. This would cover one month of expenses for me. Or I could scale back on the E-fund savings and put the extra money toward my credit card. Since I’m anticipating paying off the card in the next year and a half. I could see myself putting just \$50/month away and having \$1,800 in the E-fund by the end of 2010. However, for some reason, having less than \$2,000 when I reach 2011 seems just pathetic.

On a side note, I’ve mentioned in my previous post how I want to pay \$1,000 on my credit card each month. However, with a rock bottom budget I can only afford to pay \$800 a month (and even this is stretching it, I’d feel much more comfortable just paying \$700). When I put these values and my current debt into the CNN debt calculator it became painfully obvious how much I need to get that \$1,000 each month.

If I only pay \$800/month – it will take me two years to pay off AND I’ll pay \$4,073 in interest.

If I pay \$1,000/month – it will take me one year and 6 months to pay off AND I’ll pay \$2,965 in interest.

In other words – by not finding that \$200 each month I’m costing myself an extra \$1,000 and six months in the long run. Let’s just say that I DON’T find that extra \$200, BUT I decide to not save any more on my emergency fund and instead put that \$100 onto my debt.

At \$900/month I’d get myself credit card debt free in 1 year and 9 months and pay \$3435 in interest. Still saving myself 3 months of time and about \$600.

Huh, now that I’ve typed all of this out and gone through all the numbers I’ve realized the answer to my Emergency fund question!

When my \$1,200 emergency fund goal is met, I should continue to put \$100 each month into it. HOWEVER, if I can’t manage to MAKE my extra \$200 that month to get myself to \$800, it gets pulled from my \$100 contribution in my E-fund UP TO \$100. That way I get to save them money if I make an extra \$200 – or at least \$900 gets paid if I didn’t. I think this is an EXCELLENT compromise that keeps my E-fund growing and my debt continuing to be paid off at a decent rate.

Any thoughts on this? I’d love to hear your opinions of what I should do with the \$100 I’m currently contributing to my Emergency fund each month once I get it “fully funded”!

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2 Responses to E-fund of the Future

1. Jessie says:

I would probably put \$50/month in the Efund and \$50/month on to your credit card debt repayment. That way you don’t have to worry about the math each month, you can just commit yourself to a set amount for each category.

2. BDO says:

I am not going to take a side, but neither am I a “fence sitter”. The point is to get into a mindset where debt-free and financial stability are your goals. We can argue math and psychology all day and it comes down to your decision and where you want to be in X years. Whatever way gives you stability away from debt, I say go for it. It is that simple. Financial gurus will always find ways to sell their latest strategy. But the point is your commitment to your goals. As long as you are on track with your goals and working everyday to earn your freedom back from the banks and marketers that convinced you to get into debt, that is great. Keep up the good work!