Molly’s Money | Reader Question: Tackling Debt and the Emergency Fund

We are BACK for another edition of Molly’s Money where I talk about all things money, personal finance, etc. And I’m really excited to bring another Reader Question to the series. These are actually some of my favorite posts to write because I feel like a lot of the reader questions that I get are questions that SO MANY of you want to ask… and often times, the reader questions spur some really interesting debate and further discussion and further questions, etc. etc. etc.

So, without further ado, this week’s question:

“[…] I know you wrote about consolidation. Have you read any of Dave Ramsey’s methods (ie snowball effect)? I’m in the process of paying off some bills. Curious to see if you think it would be better to tackle a smaller bill that has a fixed low interest rate (ie, small student loan that isn’t going to fluctuate) or go after a higher bill with a higher interest rate first (credit/store card) to stop getting hit with the high interest…

Also – what do you consider to be a good amount for an “emergency fund”? I’ve read everything from $1,000 to six months of income and everything in between.”                  -Kelly W.

Oh man I LOVE THESE QUESTIONS.

I will preface this by saying that I am not a professional financial advisor and before you really do anything major, I would seek professional council. My knowledge comes purely from my own personal experience (A LOT of personal experience) with this stuff AND the fact that I am married to a professional financial advisor. So, there’s that.

Now, to address the first part RE: dealing with debt. I wrote a post about this exact issue about a year and a half ago that goes into a lot of detail about my thoughts on this. BUT, to more specifically address Kelly’s question – the answer really is: it depends. It totally depends on your situation.

I love Dave Ramsey’s approach to dealing with debt, but when I was in my situation ($36,000 in credit card debt), the snowball effect would have really been difficult for me. My interest rates were so high as were the minimum payments for my cards, the snowball effect (tackling the card with the highest interest rate / lowest balance first) would have still taken me a LONG time to pay everything off.

I was just too far in over my head to make something like the snowball effect worth it for me. When I contacted NovaDebt, really sat down with their credit counselor and got to working on a consolidation plan for me, I knew that this was the route I needed to go in order to get out of debt.

So, you have to ask yourself this question – if you are going to do the snowball effect method of paying off debt, you have to figure out if you can still pay / attack your other debt / bills while being aggressive towards the smallest one / highest interest rate one.

If you know that you can’t make the minimum payments on your cards and your debt is just too much for you to even begin to manage, then consolidation might be a great route for you. I really do, personally, highly recommend using NovaDebt. No, they aren’t a sponsor of this blog. I used them to help me consolidate my debt and without them I’d probably still be in debt.

For the second part of the question – The Emergency Fund.

In Dave Ramsey’s program, he talks about The Baby Steps to financial freedom and financial peace. And one of those steps is creating an Emergency Fund.

What is the emergency fund? It’s exactly what it sounds like… it’s a pot of money that is set aside PURELY for emergencies. It is NOT fun money. It is NOT vacation money. It’s not even “savings” – it’s for EMERGENCIES. It’s for when you lose your job. It’s for when you need a new radiator in your car. It’s for when you’re on vacation and your wallet is stolen and you need access to money to get home… or something. It’s for when you have to get a root canal. It’s for those unexpected things that come up that you just can’t plan or budget for.

When should you fund your emergency fund? AS SOON AS POSSIBLE. This is one mistake I made early on in my debt paying off process… I did NOT have an emergency fund at first. I just tackled my debt. But then stuff would happen and emergencies would happen and I’d be in the hole and unable to pay for the emergency. It’s not a good place to be.

So, I recommend building that emergency fund as quickly as you can.

For an emergency fund, you need A MINIMUM of $1,000. If you’re in serious debt, start there. Create an emergency fund of $1K and then gradually add to it. You want to work up to having SIX MONTHS of expenses in that emergency fund.

John and I, personally, have six months of expenses saved in our emergency fund. That money DOES NOT get touched. Now, these are six months of BARE BONES expenses… we do not include cash, fun money, vacations, etc. in emergency fund money.

Our emergency fund money and our six months of expenses would cover our mortgage, essential bills like phone, water, electric, etc., gas, and food. So, if one or both of us happened to lose our job or become disabled or sick… we’d be able to cover ourselves for six months on our emergency fund.

This past fall we had a TON of major expenses hit us at once – our heater went out (TWICE), we had some major repairs on a car that needed taken care of, our dog got sick, etc. So, that’s where our emergency fund came into play. We have been slowly working to build it back up and we’re back to having that money set aside.

So, while that doesn’t DIRECTLY answer your question, per se… I’d say you need AT LEAST $1K in your emergency fund and then from there, build it up to six months of bare bones expenses.

Those are my thoughts…

What about you? How do you deal with debt? What about an emergency fund? Do you have one? What other money questions do you have? Sound off in the comments below.