A friend of mine has a couple of small renovation projects under way on his home, and he’s looking at two sizable invoices that are due for payment this month. The numbers aren’t huge; both are in the mid-four figures. Still, this is causing him a bit of anxiety because he may have to dip into his emergency fund to pay the bills.
He is concerned enough about it that he called me to talk through his options. I shared my standard “I’m not a financial advisor” disclaimer, but it did no good. (For reasons that will be obvious in a moment, I think he should connect with an advisor.)
My friend loves his emergency fund. He’s a bit fanatical about it, to be honest.
This is understandable. Emergency funds are an important part of any financial plan. Opinions differ on how large your fund should be. My personal view is that you should evaluate the risks currently present in your life, and save accordingly. If job loss is a possibility, I don’t think it’s unreasonable to try and save six or even 12 months of income. At other times, having just a couple of thousand put away is sufficient. The only rule that applies universally is that saving is a good idea.
Here’s my friend’s question: Should he dip into his emergency fund to pay off the bills, or should he pay a portion of what he owes with his line of credit?
The answer seems so glaringly obvious to me that I had a hard time holding back. I would never, ever pay interest on a loan when I have cash at hand. I’m afraid I put this to him rather bluntly.
This is where the debate got interesting. As he talked me through his thought process, it became clear just how worried my friend is about drawing down his emergency fund. The interest he’d have to pay the bank that issued his line of credit is – in his mind – worth it.
Is it reasonable for my friend to pay interest on a loan so that he can rest easy with a sizable emergency fund? Or is he allowing his anxiety about money to get the better of him?
You know which side I’m on. What do you think?
|Check out more financial planning tips and tools.|
How money-savvy are you?
Will your choices help you reach your financial goals?
Try our Financial habits quiz.