as the likelihood of an emergency increases your plan changes too

October 6th, 2007

As the likelihood of an emergency increases, your plan changes too

It’s that time of year again. I call the furnace maintenance people to renew our existing contract, and while on the phone with them, they make noises about the age of our furnace (it’s 20 this very year, by the way). They ask if we’ve thought about replacing it and try to sell us on the benefits of their “upgraded” service plans, because with our furnace being the age it is, we can (according to them) expect service calls this year. I sigh, decline their offers of upgrading or replacing (just not in the budget at the present time) and think about if I’m going to regret this decision come winter.

Right now in our debt reduction mode, we have a $1000 emergency fund. It may not be ideal, but it will likely cover any small single emergency that may come up in the immediate future, such as a home or car repair or a medical issue. Most of our available money is being funneled as aggressively as we can towards debt reduction. But at some point, we may need to take another more objective look at our situation and make an adjustment in this line of thought.

We have one priority that ranks above all others. Not until the credit card debt is gone. The credit card debt hangs over us and needs to be eliminated to give us some needed breathing room. Not until the credit card debt is gone.

But, in that time after, the time I cannot wait for, there may need to be an adjustment. For there are several things in our life that could go wrong, and we need to plan for them. Especially the expensive ones. The furnace, as I mentioned above. Our fridge is even older than our furnace, at the ripe old age of 23. My spouse’s car is a 1996 Toyota, and mine a 2001 Saturn. Both doing well right now, but the likelihood of problem increases rapidly as more time goes by.

I am saving a token amount each month separate from our emergency fund to help cover replacement expenses ($25/month) but as time keeps passing we are going to realistically need to do more, or risk a major expense wiping out much of our progress.

This has lead me to an idea I originally read about on The Simple Dollar – putting the extra amount towards paying down student loans in a savings account as a backup emergency fund and then each time it reaches a certain level, using the majority to pay down the debt in one chunk. Then repeating that process over and over again until the student loan debt is gone. This method would cost us more in terms of interest but is the peace of mind worth the increase in cost? And what about the periods where you pay down a big chunk of debt? As the account is building back up, you’re back in that same state of vulnerability you were in in the first place.

I honestly don’t have answers right now. It is just something I’ve been mulling over in my mind. The fine details, the exact method, all the little bits and pieces that may make it successful – those are for another day closer to reality. Our situation might be different then. For now it is just the kernel of an idea, a possibility to consider once the credit card debt has been completely wiped out. And that in itself makes me excited to think about it. When the credit card debt has been completely wiped out….

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10 Responses to “As the likelihood of an emergency increases, your plan changes too”

  1. We are in exactly the same boat. We spent years without any back up fund to try to concentrate on debt. That was a mistake. Now we try to keep about $2000. But like you, there are doubt of whether that is enough and what if this happens ect. Ugh! It is so frustrating sometimes.

  2. When we were living in an older house, I kept a “house emergency” fund, separate from our regular emergency fund. At the end of the year, if there was money left in the fund, it went to replacing things that needed replacing, like our fence or floors (hello, carpet pad, I can see you through the holes in the carpet!). But during the year, it would go to fixing the toilets when they broke or the garbage disposal, etc. It worked for me. I don’t have one now, with a new house, but it won’t be long before I need to start one again.

    And I do the same thing with my car, since it’s old and went through a break-down-every-other-week phase. If I don’t use the funds, they will go toward the down payment on a newer car.

    I think this is an important part of debt reduction – starting to think ahead, so that emergencies aren’t quite so panic-inducing (or debt-inducing!). It’s a big step to even think about these things, congratulations!

    Sara

  3. Hello, love you blog!

    One method to pay debt and save and emergency fund would be to save up to say $1000 once there save pay $500 onto debt. Next time save to $1500 and plunk another $500 on the debt. Now you have $1000 EF continue the process until debts are paid off.

    Just a thought.

  4. @Stephanie – yes, frustrating! Ugh. We’ll figure it out :)

    @Sara – that sounds like an excellent idea. I need to start figuring out better money priorities…

    @ JSand – that sounds reasonable, I’m not sure if I want to slow down debt reduction by half but it is a sensible approach. Thanks!!

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