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Question:


I have peers who recommend having enough money in an emergency fund to cover anywhere from 3 to 12 months of living expenses. But I also hear that the amount to keep for emergencies should depend on how much debt a person carries. Which do you recommend?
-Margee Eberly


Answer:


You can have an emergency fund and minimize your debt at the same time. Say you need $4,000 a month to cover your nut and you want six months’ worth of expenses for a rainy day. That means you’d like to have $24,000 available. Say also that you’ve got $10,000 in debt on your credit cards. Whatever money you put in a savings account will earn you close to nothing, while you’re probably paying 12 percent or more annually on the card debt. It would be sensible to get out from under that high interest burden by making it a priority to pay off the cards, knowing that you’ll almost certainly be able to draw on them again in an emergency. Why not set aside a month’s worth of cash in this scenario, because it’s always good to have some on hand, then pay off the cards, then keep adding to the emergency fund? Once the cards are no longer an issue, you’ll be able to set aside cash all the more swiftly.

-Conrad de Aenlle



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