Don't compromise your emergency fund

Chris and his wife are debt-free. They're ready to build their first house, but they're a little short of the 20 percent Dave recommends for a down payment. Should they dip into their fully-funded emergency fund to make up the difference? Dave gives them some guidelines.

QUESTION: Chris and his wife are debt-free and ready to build their first home. They’re a little short on cash for a 20 percent down payment, so Chris asks if they can dip into their fully funded emergency fund for the difference. Dave tries to give him some guidelines.

ANSWER: Well, I don’t know how short a little short is, and I don’t know how big your emergency fund is. If you use a little of your emergency fund to round off the 20 percent, and then you have an emergency, where are you going to be? If you’ve got $50,000 in your emergency fund and you use $10,000 of it, you’ll be fine. If you have $10,000 in it and you use $9,000, that would not be fine. That’s the way you’ve got to look at it. Use a little common sense with the numbers. The problem is, I don’t have your numbers.

I recommend three to six months of expenses set aside for an emergency fund. If you have six months’ worth sitting in the bank and you took it down to three, you’d probably be okay. But if you spend it down to $2,000 and move into a new house, you’re asking for trouble.

I’d love for you to put down 20 percent because you’d avoid private mortgage insurance (PMI), which costs about $75 a month per $100,000 borrowed. It costs you a lot of money if you don’t put down 20 percent. You should try to do that, but don’t be irresponsible on the emergency fund side. Your emergency fund, when it’s there, has a tendency to keep emergencies away. When it’s not there, a lack of it tends to attract emergencies.

Your life starts to sound like a country song when you’re broke!