No Emergency Fund Means Living on the Edge

Kelly and her husband have $50,000 in the bank and no debt. They owe $70,000 on their house. Kelly wants to use the money to pay down the house and rebuild the emergency fund. Her husband disagrees.

QUESTION: Kelly in Pensacola and her husband have $50,000 in the bank and no debt. Both of their kids have college funds. They owe $70,000 on their house. Kelly wants to use the money to pay down the house and rebuild the emergency fund. Her husband disagrees. Dave agrees with Kelly’s husband.

ANSWER: If you don’t have an emergency fund, what happens when you have an emergency? The problem is the risk you’re taking. You’re living in a $200,000 or $300,000 household income. Yes, financially, you’re in really good shape partly because of planning, partly because you have a great income. You’ve done good with that. Congratulations. Very unusual—unusually good. But I just don’t want you sitting there with no cash, and $10,000 in your world is no cash.

The rule of thumb that we use is keep 3–6 months of household expenses set aside. You guys can establish that number to be however you want to back into it. You could cheat down to the three side temporarily if you wanted to, but I don’t think $10,000 covers three months of expenses.

I think $10,000 is too low; I think $50,000 is too high. Somewhere between there, you guys pick out a number and say you’re not going to go lower than that number. Let’s just make up one—$20,000 or $30,000—something like that. Throw the rest of it at it, and roll up your sleeves and knock that house out by Christmas. I think you can do both.