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Why We're Prioritizing Our Emergency Fund Over Student Loan Repayment

(Originally posted on The $76K Project on 8/6/2018)

Our temporarily relaxed budget and a vacation to the mountains made July a fun month. It was refreshing to leave town and my office, and it felt luxurious/weird to splurge on things that are clearly more in the category of wants (e.g., condo rental, kitchen gadgets, beauty products, overpriced sightseeing activities) rather than needs. July was our opportunity to take a break from the grind, and it was completely worth it.

But now it's August, and it's time to get back to business. Fortysomething will be returning to work, the Kiddo will be returning to school, and we'll all be returning to our budget and the pursuit of our long-term financial goals.

Do I feel ready?

No!

Are we all going to buck up and do it anyway?

Ummm, yeah. Sure.

Our August started off with a key decision. You may recall that after we paid off our credit card at the beginning of July, we were trying to figure out the best way to deploy the last of our 2018 bonus money. We knew we didn't want to just fritter it away, but we were also a little overwhelmed by the plethora of financially smart possibilities: Emergency savings? Student loans? Investments? Down payment for a house?

After much discussion, we realized that our two top priorities at the moment are paying off our student loan debt and socking more money into savings. We identified three main options:

Option 1: Attack the student loans. In this scenario, we'd use all bonus money + third August paycheck + $2000/month (the $2000 represents all of the "extra" money that we have available for pursuing our financial goals each month) to pay off a significant chunk of my student loan. The bonus money and extra paycheck alone would reduce my loan balance from ~$10K to about $6K, leaving us with a total loan balance of $46K.

Option 2: Beef up the emergency fund. This option would involve putting all bonus money + third August paycheck + part of disposable income into our little emergency fund. For the past few months, our e-fund has hovered somewhere between $1K and $1.5K, the amount that debt repayment guru Dave Ramsey recommends keeping in savings until all debt is paid off. Adding our bonus cash to the pot would bring the balance to $5K and give us a little more financial security in the face of an unexpected and expensive crisis.

Option 3: Split the difference. Allocate part of the bonus money + third August paycheck to emergency savings, and part of it to student loan repayment.

We eliminated Option 3 almost immediately because I'm a very all-or-nothing, go-big-or-go-home type who has trouble doing anything halfway. Divvying up the money and spreading it thinly over loans and savings didn't feel satisfying to me. Should we base our financial decisions on our feelings? Well, no, but for the sake of motivation, sometimes you have to take your feelings, inclinations, and gut instincts into account.

My gut tells me that I need to see big gains - one way or another - to stay motivated.

When I posted our dilemma on Twitter and asked for advice from the personal finance gurus of the Twitterverse, almost all of the respondents told us to choose Option 1: go all out on those student loans. Make a big dent ASAP. Accelerate our payoff plan.

And I have to say that for most of July, both Fortysomething and I were completely on board with that because it meant we'd be truly putting our money to work rather than letting it idle in our low-interest savings account. Plus, going all-out on the loans would allow us to pay off our student loans in less than two years. And that sounded really, really good - the sexiest option of the three.

But then some realizations set in.

First, we need enough money in savings to cover at least the $2700 family deductible of my high deductible health plan, if not the $7500 out-of-pocket maximum. The Kiddo's emergency surgery back in March should have burned this lesson into our brains. We're still in the process of paying the $4000 hospital bill (I use my HSA to make monthly payments of $400), and I don't want to add to that total if we have another big medical expense.

(Sidenote: why, you may ask, did you select the HDHP when there's a low-deductible plan available? And the answer is that (1) the premiums for the traditional plan have skyrocketed, so it's not that appealing even if the deductible is lower, (2) if for some reason I lost my job, I'd never be able to afford the COBRA premiums for the traditional plan, and (3) with my HDHP, my company makes regular contributions to my HSA. FREE MONEY, people. I can't pass that up!)

Second, recent developments at work make me feel less secure than I did a month ago. I don't think I'm on the verge of losing my job, but over the past week I've been learning some hard lessons about corporate America: one, everyone is expendable, and two, companies don't feel bad about replacing people or erasing their positions literally overnight. These may sound like obvious truths to some of you, but before my current gig I spent years in academia where the wheels of bureaucracy generally turn much, much more slowly. If you don't get tenure, or your contract doesn't get renewed, usually you still have some time to look for another job and squirrel away some cash before losing your paycheck entirely. You have to do something truly awful/criminal to come in one morning and find that the locks on your office door have been changed.

But big corporate companies? Nah, they're apparently cool with it.

Bottom line: it's clear that the smart move is to save up some money so that if I'm suddenly jobless, we can still pay the rent.

At the moment, our savings goal is $5000. We may increase that just a bit more: $6000 would cover our rent for three months. Assuming that at least one of us is employed at any given time, we would then have several months' worth of financial runway. That'll help me sleep better at night.

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