E-fund of the Future
September 8, 2009 2 Comments
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”!