Friday, January 9, 2009

Cost/Benefit: Using emergency fund for credit cards

Yeah, yeah. I know, anyone will tell you, DON'T use your emergency fund for credit cards because in the event you need that money, you have to rely back on to credit to get you out of the situation.

Here's what I determined would happen if I used the emergency fund that I have built up right now (while still contributing 10% to it at the same time) vs. not using it to pay off credit card #1 before June 1st.

Option 1: Use emergency fund to pay down credit card #1.

$3,400 balance - $2,300 emergency fund = $1,100 remaining balance

Jan contributions= $100 emergency/$100 payment
January balances= $100 emergency fund/$1000 credit card balance

Feb contributions= $200 emergency/$300 payment
February balances= $300 emergency fund/$700 credit card balance

March contributions= $200 emergency/$300 payment
March balances= $500 emergency fund/$400 credit card balance

April contributions= $200 emergency/$300 payment
April balances= $700 emergency fund/$100 credit card balance

May contributions= $300 emergency/$100 payment
May balances= $1000 emergency fund/NO BALANCE

SUMMARY: Credit card will be paid in full by the first part in May, remaining payments can be transferred to credit card #2.
Option 2: Continue to pay down credit card w/o using emergency fund.
Adding up all payments plus an extra $300 for May = $1,400 paid towards credit card with a remaining balance of $2,000. YIKES! While my emergency fund would be $3,300. NICE!
Now, obviously I'm not counting any contributions from boyfriend, so I'm just looking at what I can contribute at the moment. I really don't see why I shouldn't use my emergency fund because obviously if I leave the remaining balance of $2000, credit card 1 is going to charge interest for the past year. This could be anywhere from $200-600. OUCH. At the same time, I AM building my EF back up slowly but surely so when I'm done, I should have a solid $1,000 plus interest.
Any thoughts? Advice?


louise said...

I struggle with this as well, it's frustrating seeing money in my emergency fund when i have credit card debt so I usually end up paying it off the debt. maybe you could reduce the size of your emergency fund to $500 - $1000 and use the rest for debt reduction?

LL said...

Hi Louise, thanks for the advice. I'm in the same boat with you. When you see that you are in the green with one area and in the red in another area, it's hard not to justify it by paying it down.

I'm hoping I won't have to use my EF at all; provided that bf can pay the remaining $2000, my EF will be safe and secure. If at the last moment I still need money to cover the entire debt before June, I will use my EF. :)