I'm in a bit of a dilemma and could really use some advice.
Here's my situation:
- I currently have an emergency fund covering 3 months of expenses sitting in my savings account;
- I have one remaining loan with a balance a little under one-third of my emergency fund and a 12.5% interest rate;
- No other debts, two credit cards with no outstanding balance and have a company car;
- I don't need my savings for anything immediate;
- If I were to become unemployed, my unemployment benefits would actually cover my current lifestyle completely (mortgage, living costs for a one-mans household, and other obligations would all still be easily manageable).
Now I'm considering to use about one-third of my emergency fund to completely pay off this loan. This would save me roughly 15 months of payments and a total of around $500 in interest costs. Getting my emergency fund back to the current point again would take me about 4-6 months.
I know the general rule is "never touch your emergency fund" when it would exceed the €1000, but given my circumstances, I'm wondering if this might be an responsible exception to that rule and spend that almost-€3000 for the full payment of this loan.
I am in doubt because of this is 3 times as much as the temporarily acceptable use of an emergency fund, even though I can miss it and there seems to be a low risk for me. Am I missing any important considerations here?
Should I use part of my emergency fund to pay off high-interest debt?
byu/Lunar-Journey inpersonalfinance
Posted by Lunar-Journey
8 Comments
Touch your emergency fund and get rid of that debt. Frankly, that’s an emergency.
I would keep adding extra to your emergency fund until you have enough money in there to pay off the loan and still have 3 months of living expenses.
The general rule of thumb isn’t to never touch your emergency fund; it’s to only use it for emergencies.
High interest debt is generally considered an emergency.
Pay off the debt.
is your loan payment rolled into your EF? Because if it is, then using it means you actually get a little breathing room in your EF. Depending on how big your payments are, it may not free up much headroom – but it will be some.
I’m in favor of paying it off. General rules are just those – general rules. There are conflicting rules too: “Save $1,000 EF then aggressively pay off your debt”. Rules are more guidelines, and if they were always individualized, then they would be useless to anyone but yourself. Which is why you take these “rules” and use them to make YOUR rules.
Pay off your loan – it’s going to feel great. And if it feels yuck to only have 2 months EF, get a paper route to speed up capping it back off.
No brainer… Pay off the debt. That’s the same as making a guaranteed 12.5% on the money, which I’m sure is a lot more than your savings is currently paying.
Pay it off. 12% interest ***is*** an emergency. Think of it this way; as long as that loan remains unpaid, keeping that money in your emergency fund is ***costing*** you 12% annually.
Yes pay off the debt. You will be able to save a good chunk of change that can be used to replenish your emergency fund.
Using your fund is appropriate use of such fund.
You seem comfortable that you can manage even with a job loss. I agree with others… 12 percent is an emergency, and you seem comfortable that you can manage without it, at least in the short run. Just prioritize building it back up.