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The Emergency Fund in Debt Payoff

The Emergency Fund: Because Life Happens

We’ve all been there.  The washer breaks down… the roof starts leaking… the dentist tells you you need a root canal.  Life happens and unexpected expenses come up.  To deal with the curve balls life throws at us, we need an emergency fund- a pile of money that is readily available and there for us to cover these little hiccups.  

Without an emergency fund, the nuisances of life become a true emergency.  Heart rates go up.  We pull out the credit card and go more in debt.  Then, we lose sleep wondering how we’ll get out of debt.

In a recent newsletter that I only send my subscribers, I recently wrote about how happy I was that we had spent the money to invest in a nice washer and dryer.  Of course, in doing so I tempted the universe.  Wouldn’t  you know it? The dryer broke the next month.  

With two toddlers and many, many “accidents,” this little hiccup sure could have become a true emergency.  But, we were secure with our emergency fund and my husband did the research and went out to buy a new one the next day.  On a side note, we learned from the repairman that there really is no value in spending double on the chrome lined dryers with twenty different settings.  A basic one with 5 settings will do just as well.  

How to Save an Emergency Fund

Well first, you’ll need some extra money.  That’ll either come from more earnings or less spending.  But, to determine how much money you can save, you’ll need a budget.  

How Much to Save

Most advisors will recommend saving three to six months of living expenses.  This will cover you not only if you have a little hiccup, but also in case you lose your job and need to job hunt for a few months.

When my advisor told me that, I honestly didn’t know what to make of it.  I initially took that to mean we needed to save three times our total monthly spending.

But, if I lost my job, I could most likely cut down on eating out.  I wouldn’t need daycare because I could watch the kids myself.  I could put a hold on shopping for clothes until we were stabilized. 

So to calculate our living expenses, we need to add up the expenses of things we truly NEED to live- a roof over our head, food, utilities, insurance premiums… etc.

An important thing to know for people with student debt is whether our lenders have any type of concession for payments in the event that we lose our job.  If your lender doesn’t have some sort of unemployment concession, you’ll need to add the monthly payments to your living expenses (another reason to pay the darn loans off!).  

Federal loans are probably the most forgiving.  One of the reasons I chose to refinance with SoFi was because they do have an unemployment protection program.  Hopefully, I’ll never have to use it.  But it’s good to know it is there.

Another important thing to keep in mind is insurance deductibles.  In case Murphy’s law proves true and you lose your job, your house burns down, and you have acute appendicitis that requires emergency hospitalization and surgery, you’ll need a cushion to cover the deductibles on your insurances.  Seem outlandish?  Work in a hospital and you’ll hear stories like that often.  

The Emergency Fund During Debt Payoff

Some argue for a smaller Emergency Fund during debt payoff.  If you’re a Dave Ramsey fan, his first step is saving a $1000 emergency fund, second is debt payoff (except the mortgage), and third is amassing a three to six month emergency fund.

We actually started backwards- we saved a six month emergency fund first.  But, after discovering Dave, we cut the emergency fund down and put 2/3rd’s of it toward the debt payoff.

We still keep a 2 month emergency fund because we have a rental property and a high deductible health plan, so we need a larger cushion. Still cutting the Emergency Fund down initially made me very nervous.

But, the beautiful thing about being in debt payoff mode is that we are living way below our means which means, we have a lot of extra cushion each month.  Should an emergency arise, we can cover it with the money we would have otherwise put towards debt payoff.  Should any job instability arise, we can beef up the Emergency Fund quickly as well.  

Think of the monthly budget as a rubber band.  When we are spending everything we are bringing in, our finances are stretched to the limit.  If life brings a blow to that band, it can easily break.  When living below our means, we have plenty of slack in the band.  Forget Murphy, we can bring in Newton.  If life deals a karate chop, we can take it, give it an equal and opposite reaction, and bounce right on back!

So how large should your emergency fund be?  That’s dependent on your situation and your comfort level.  You should definitely have one.  But, a smaller emergency fund may be fine in debt payoff if you’re living way below your means and working on paying off debt.  

Till next time!  

Stay frugal, ya’ll.

Dr. D

Standard Disclaimer: Not meant as individualized financial advice.  Photo from            


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