Emergency Fund: Slight Change in Philosophy

Today I have decided that I am going to make a significant change in my emergency fund plans. Since I am currently in debt I am going to reduce my emergency fund to $1000 and use the remainder to pay down my credit cards.

After doing some reading on the subject and analyzing varied opinions and numbers I have concluded that this is the best option. Here is why:

  • I earn a max of 2.15% at SmartyPig. My fixed rates on my balances are 6.99% and up. I am mathematically much better off here.
  • Cashflow issues: Having multiple minimum payments to make squeezes my budget a good bit. By paying down with savings now I can accelerate my debt snowball. This will eventually turn into putting the money back into the emergency fund.
  • Peace of mind. I do stress daily about my debts. Paying it down faster ends my stress faster and I can move on with my life!
Above is the upside to this decision. I also had to weigh the down sides to make sure I am doing the right thing. In my opinion, I am making the best choice for me. Here are the downsides:
  • Job Loss: If I get laid off I have a lot less cash to fall back on. One counter-argument is that I could simply use the cards again. While this is not ideal I will take this risk.
  • Interest rates go up. While unlikely I do have opportunity cost of not being able to invest the savings in a higher rate investment.
  • Further away from self employment. This delays my plan to work for myself but the financial gains over the long term are worth it to me.
Overall I think I am making the best decision I can in this situation. The peace of mind from paying this down sooner is a big deal to me. It will outweigh the stress of losing my job if that were to occur. My suggestion to anyone facing this same problem is to look at all angles and go with what helps you sleep better at night. Having a bigger emergency fund now with debt is ok if it reduces stress!