A lot of conventional advice says to pay off debt first. Dave Ramsey says to stash a grand (or a bit more or less if your income is real low or high) then pay off all consumer debt before getting an emergency fund set up. I am not so sure this is the way to go. It is complicated and there are a lot of variables (how secure your job is, interest rates you are paying, etc) but I like holding cash. If you loose your job and get into trouble having a bit less debt will help but it will not put food on the table or pay to keep a roof over your head, for that you need cash. Suze Orman seems to be thinking more along the lines I am.
As for how much of an emergency fund you should have. Folks say as little as two months to as much as a full year. I think it varies based on your financial situation, job stability, 1 vs 2 incomes, etc. Right now I am comfortable with an emergency fund of 3 months. (Not factoring in cash on hand or precious metals) My job is pretty secure and since we have minimal debt our lifestyle could really be changed if need be which would allow that cash to last awhile. I have a couple of friends who have good jobs in the trades. One was out of work for 4 months recently. He got unemployment which helped but he was fine. With the time he went on a long trip to visit his brother who is going to school a couple states away and did a lot of hunting. He was able to do this because he lives the same modest lifestyle he's had for awhile though income grew significantly and saves a lot. Another friend works in a trade where he is fairly often unemployed between projects. He has an under the table (far lower paying) job for in between projects and also saves a lot. He usually is unemployed for about 2 months strait during the winter.
If we were a one income family and I worked in the private sector we would want to save some more. People like my friends and real estate agents who work on commission or contract need to save more. Chief Instructor once said that you should plan on a month out of work for every $10,000 a year earned and that is probably worth considering. The more at risk your income is the more you need to save. At the end of the day you know your individual situation better than I do.
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I think you should set up a 2-3 month emergency fund as the first priority, unless Guido from the local godfather is threatening to break your knees. If all you do is stash a grand before tackling consumer debt, then the first time you get hit with anything unexpected (say, a major car repair) then you're hosed and will just run up more on the credit cards.
This would be my gameplan... I figure once you get to step #6 you're in pretty decent shape...
1) 2-3 month emergency fund
2) High interest rate consumer debt (worst credit cards)
3) Consider building emergency fund up to 3-6 months depending on circumstances now. If not now, do it after the next step or two.
4) Other consumer debt other than autos, homes, and student loans
5) Pay off autos
6) Consider accelerating student loan payments, and/or save money to buy next car in cash (depends on student loan interest rates)
7) Consider accelerating mortgage payments based on prevailing economic conditions and availability of other investment options.
Chris, I am inclined to agree with your plan more or less.
Then again, I think some people make it hard on themselves... I know public school teachers with >$50K in student loans. Its pretty much impossible to pay off more than $50K in student loans on a teacher's salary in many parts of the country in a reasonable amount of time. Its like a 30-year mortgage on your life.
Throw on a moderate car payment for a used car, a rent payment (or small mortgage), and perhaps a few grand of credit card debt left over from college and that's a tough row to hoe.
I'm not saying its impossible, and I'm not saying that I feel bad for them (they made their own beds, now its time to lie in them) or want to write a check to pay off their debts, but a lot of people have made choices that pretty much set them up to fail. Its even worse for people who have that much student debt without a stable, secure job.
By the way, love the logo these days.
Perhaps, being younger I am not as wise in the ways of the world, but couldn't you simply handle those emergency car fixes or whatnot with the same credit card that you've paid off? The difference is how long you're paying interest on that card while trying to save up a larger emergency fund, is it not?
Chris, Some people do make it hard on themselves. When it comes to teachers I think we as a country have a lot of work to do. Many of the best and brightest who would like to teach will not do so simply because they can't afford to buy a home, save, etc. The shift in educational costs from government to individuals that has been coupled with a huge increase in the costs has hurt students, particularly those looking to go into necessary but not hugely paying fields.
Dan, To me the first step in getting out from under credit card and other consumer debt is to stop using it. To do this you must break the cycle of borrowing your way out of emergencies. If you scrimp and save to pay off $2,000 in principal then need a new transmission for $1,800 you aren't getting ahead.
Chris: It's easy to say, "they made their bed", but it's not that simple. When an 18 year old is leaving high school, everyone in the world in telling them "you should go to college"; they don't know any better. They go and get a piece of paper and end up with 50k in loans and an entry level job and realize by about age 30 that they should have taken up a trade. It is a problem with our society, and you can't blame an 18 year old for listening to "older, wiser" people.
It is damn near impossible for a family to pay off 50k in student loans, have a decent used car, a house that is out of the city enough to be somewhat safe, and still put away a 3 month emergency fund.
That is not an accident, it is all by design of the government to keep everybody underfoot, and I realize that, but it still pisses me off. We make decent money and are not living above our means, but I can barely afford to buy a little extra food to put back every month let alone put back 3 months savings.
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