# Should I keep building my emerg. fund or pay car loan?



## bmckay (Mar 10, 2011)

I have about $2000 saved for an emergency fund, but have a car loan at 5% with still ~ $19,000 left on the loan. Should I stop contributing to the emergency fund and paying down the debt more aggressively?


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## ChrisR (Jul 13, 2009)

Are you allowed to pay down the loan? Some loans have stiff penalties for pre-payments. If this is the case, it may still make sense to pay off the loan and swallow the penalty, because 5% is pretty stiff by today's standards. If you're going to pre-pay the loan, you'll have to read your loan agreement carefully to decide how that is best done.

The next question is: How much do you need an emergency fund? If you have a family to support, then the emergency fund is probably a high priority. If you live in Mom and Dad's basement (or even if you have the option of returning to the basement) then the emergency fund isn't nearly as big a deal!


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## bmckay (Mar 10, 2011)

Yes, I believe there is no penalty to pre-pay the loan. I am supporting myself and my wife while she waits for her permanent residency as she is unable to (legally) work until she gets it. Monthly fixed expenses are currently $1700.00. I was just wondering what the consensus is on emergency fund vs. car loan at 5%. I am thinking about going with a hybrid approach and using half of my monthly savings towards the loan while saving the other half. It does give me peace of mind having money in the bank if I were to lose my job or any other emergencies.


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## bmckay (Mar 10, 2011)

I suppose we could move in with my mum for a month or two if the bottom falls out, but i would rather us have our own plan B!


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## Butters (Apr 20, 2012)

Dave Ramsey thinks $1000 is enough...
http://www.daveramsey.com/new/baby-steps/

Your $2000 should be fine!

Start tackling that debt 

Any cash work your wife can find would help out...
Raking leaves, delivering flyers, shoveling snow, maybe some deliveries


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## the-royal-mail (Dec 11, 2009)

$1000 enough for an emergency fund? That won't even pay for 3 weeks of living expenses in case of adversity!

I feel that 6-12 of regular living expenses unaided is a good goal for an emergency fund.

In your case I would continue saving up that fund, and continue to make your car payments. Credit may be a bit scarce if you lose your job and the roof springs a leak.


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## marina628 (Dec 14, 2010)

$2000 is not much money to really make a difference , your peace of mind is worth more.I would keep saving for emergency fund as if you paid that money on car then had a real emergency you may be forced into a higher interest debt solution..


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## Synergy (Mar 18, 2013)

Personally I'd pay down the debt as quickly as you can. If you need an emergency fund, see if you can score an unsecured LOC for 10-20K at a rate of prime +1, which is currently lower than your car loan.

Here's a contrarian article from Money Sense. It's geared towards retirement, but still an interesting read.
http://www.moneysense.ca/save/emergency-funds-in-retirement


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## Cal (Jun 17, 2009)

Synergy said:


> Personally I'd pay down the debt as quickly as you can. If you need an emergency fund, see if you can score an unsecured LOC for 10-20K at a rate of prime +1, which is currently lower than your car loan.


That's probably the way I would go to. However you haven't told us how secure you feel your current job/situation is.


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## Just a Guy (Mar 27, 2012)

Before I got hurt, I had about 20k in an emergency fund...had to support a family on that for a couple of years, or learn to make money another way than working...

No one plans for an accident, but $2000 is no security net.

When you're injured and can't work, no one will lend you money.


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## HaroldCrump (Jun 10, 2009)

You barely have 1 month of living expenses.
Your emergency fund should be at least 3 months of living expenses, ideally 6.
12 months would be the conservative end.

A car loan rate of 5% is not bad at all.
If you are able to save some money at the end of each month, and carry the car loan payment, I'd suggest bite the bullet and keep paying the car loan until you have built up 6 months of emergency funds, plus the amount required to pay off the car debt.


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## rford (Aug 16, 2014)

Synergy said:


> Personally I'd pay down the debt as quickly as you can. If you need an emergency fund, see if you can score an unsecured LOC for 10-20K at a rate of prime +1, which is currently lower than your car loan.
> 
> Here's a contrarian article from Money Sense. It's geared towards retirement, but still an interesting read.
> http://www.moneysense.ca/save/emergency-funds-in-retirement


Who offers an *unsecured* LOC with prime +1?


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## HaroldCrump (Jun 10, 2009)

HELOCs are P + 1 or P + 0.50 (at best).
Unsecured LOCs can be P + 3%.

As for that Money Sense article, stupid thing is behind a paywall.
I had to use VPN to read that darn thing.
The advice in there pertains specifically to a retired individual.
Since that is not the case with the OP, most of the advice is not relevant.
If the advice is applied to a non retired individual, then I disagree with it completely.

Also note that the author of said piece is a financial planner, albeit a fee-based one.
I am certain he will be happy to construct an _asset allocation model _for you like the one he speaks of - for a small fee, of course.


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## lightcycle (Mar 24, 2012)

HaroldCrump said:


> Unsecured LOCs can be P + 3%.


I've got P + 1.75% without negotiating. I've heard of others getting lower rates.


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## HaroldCrump (Jun 10, 2009)

lightcycle said:


> I've got P + 1.75% without negotiating. I've heard of others getting lower rates.


Possibly..it would depend on credit worthiness, relationship with the bank, and other factors.
My point was not to start a comparison war between LOC rates, but to point out that HELOC rates are typically lower than ULOC rates, and secondly there would be hardly any ULOCs at P + 0.5%.


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## HaroldCrump (Jun 10, 2009)

MathTeacher said:


> Just recently spoke with my investment company financial advisor about emergency funds. He agreed that LOC can easily replace emergency fund. 2000 won't give you much in case of emergency. A family will need more. But having 20K just sitting on the saving account while paying interest on current loans - is stupid.


But that's the conflict of interest, innit?
_Of course_ your financial advisor will say that there is no need to have $20K saved in emergency cash.
_Of course_ you should invest it.
Cui bono...

We have previously discussed the merits/demerits of leveraging ULOCs as emergency funds in past threads, so I don't want to re-hash it again.
My personal view is that cash in hand is king - it is in your control to use as needed.
Of course, you can maintain an open, unused ULOC as a 2nd tier of defense against unexpected expenses.

I agree that $20K is a high amount, esp. for someone with outstanding consumer loans like car loans, credit card debt, etc.
But at the same time, $2K is far too little - it's neither here nor there.
Everyone has to find some amount that balances debt reduction and emergency protection.

One final note - for someone with outstanding consumer debt like car loan, CC balance, etc. an unsecured LOC is not exactly a good way to save for emergencies.


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## the-royal-mail (Dec 11, 2009)

^ LOL, great post HC. That post was so absurd it was almost trollish. What is stupid is immediately flipping to credit to save your a-s out of short or long term income fluctuations. My advice to the OP is to stop talking to that "investment company financial advisor" as they are clearly putting their financial safety ahead of yours. Don't follow advice from those who have something to gain by you taking their advice.


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## Just a Guy (Mar 27, 2012)

Who said the 20k has to be sitting? You can still invest it, just put it into something more liquid and conservative. It's hard to get cash out of real estate (which makes it a great savings plan), and some stocks are liquid but too volatile. However, there are stocks that are fairly stable and boring (utilities) or GICs/bonds that can be sold quickly if required.

Many of the reserve funds on condos I own put the money in 3 month revolving GICs. We staggered them to start so that each month 1/3 of the reserve fund matures and can be used if needed. If it's not needed, they roll over and earn higher interest than in a bank account.


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## Rusty O'Toole (Feb 1, 2012)

I would pay down debts first and if you feel you need an emergency fund, a credit card or HELOC will cover the typical unexpected expense. For real emergencies you should have insurance. Life insurance, home insurance, or whatever is appropriate to your situation.

I never kept an emergency fund in my life, just enough cash on hand to pay bills and immediate expenses. A few times I have had to put emergency repairs on a credit card but quickly paid them off. For larger expenses like a car accident or house fire I have insurance.


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## My Own Advisor (Sep 24, 2012)

A car loan rate of 5% is not bad at all....unless of course you can pay this off with an LOC around 3-4%.

We always have an EF. We eventually want ours to be $10k and hope to hit that mark next year.

Back to the OP, I would personally:

-keep at least $1000 in emerg. fund.
-payoff 5% loan with a 3-4% LOC.
-use the $1000 to pay down the LOC and keep doing that until the debt is gone.

Soon after, get your emergency fund higher if possible. That's just my $0.02.


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## Rusty O'Toole (Feb 1, 2012)

I should have added that typical stock or mutual fund investments can be cashed in within a day or two. I see no reason not to invest your money and see no reason to keep a cash reserve.


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## Just a Guy (Mar 27, 2012)

Well, the stock tanking could be a good reason not to invest...as long as he avoids companies like Nortel, Worldcom, Enron, breX, etc. (all fine blue chippers in their day, or at least solid companies), he should be fine.


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## indexxx (Oct 31, 2011)

I'm not personally a big fan of emergency funds- I'd pay it off and save the interest. I use my line of credit as a low-interest emergency fund and keep my money working for me in investments. Well, actually what I do is use my cash-back credit card for emergencies (and every other purchase really) and then pay if off with my LOC if I need to.


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## swoop_ds (Mar 2, 2010)

I suggest growing your emergency fund to $5000 before stopping for a bit to pay off dept faster. The reason I say $5000 is you can put that in the bank and have the bank's 'cadillac' bank account for no fees (because they have your 5 grand sitting in there). 

I personally find the stuff that I get with the high fee bank account very valuable and my emergency fund essentially makes it 'free'. But if you don't find the perks attractive, you're better off putting it in some sort of safe investment vehicle (GIC ladder, etc).

Another idea, and this is going to border on lunacy for some people, is to convert your emergency fund into gold/silver bullion. This is risky and I don't suggest doing it with your whole wad of funds as it takes a couple days to sell your bullion if you ever need it. Also, gold and silver fluctuates so you can lose your money this way too. I keep some of mine in the safety deposit box('Free' with the high end account) and some at home hidden away.

Anyways, just a thought. I know that some people won't agree with my suggestions!


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## bmckay (Mar 10, 2011)

Lot's of great ideas and responses here. Thanks All.

Seems like plenty of proponents to both sides of the coin here, so I really think it comes down to my own gut feeling. At this stage in my life, the only thing I would truly need an emergency fund for is unexpectedly getting laid off or car repairs. Both seem unlikely as I bought a 2011 certified pre-owned honda civic with extended warranty and only 35,000 km's on it. Also my current job is very stable, but I will be looking to move into a higher paying position in my field sometime in early 2015. I may need to pay for moving expenses as I will need to move cities. I feel pretty comfortable with the 2,000 for this purpose, so I feel like it would be acceptable to start putting the few extra hundred a month towards the loan.

Does this seem reasonable?

Thank you for the helpful feedback


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## bmckay (Mar 10, 2011)

Also, articles across the net state the benefit of investing early and often in your life. But should I really be putting money towards retirement/investing when I still have this car loan - not to mention that I will also probably need to save for a down payment. I will be making much more money next year, but it just seems so difficult to do everything at once.


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## indexxx (Oct 31, 2011)

bmckay said:


> Also, articles across the net state the benefit of investing early and often in your life. But should I really be putting money towards retirement/investing when I still have this car loan - not to mention that I will also probably need to save for a down payment. I will be making much more money next year, but it just seems so difficult to do everything at once.


I say always pay yourself first, no matter what. Even if it's only $50 or $100 a month, start putting it away; the point is that time is by far your greatest force when it comes to compound interest and investing, not the amount you put in. Besides, if you put it into an RRSP, you can then use that as your down payment by accessing the first-time home buyer's program.


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## banjopete (Feb 4, 2014)

It's rather subjective but most people look at the expected rate of return, if your debt costs more than the expected investment return, pay the debt, if you expect to make more from the investment go that way. It's the same argument on pay the mortgage or invest. The nice thing about saving and investing in the long term is it changes the options you have rather than needing to solely focus on reducing debt constantly. I like MOA's idea of paying it off with a lower interest form of credit to at least try to save some interest penalty and work hard to get it down to zero as you can.


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## christinehenry (Nov 26, 2014)

Personally, I don't think $2,000 is enough for an emergency fund. If you paid off your car loan, and then were to get into an emergency, you would have to take out another loan all over again. If i were in your shoes I would calculate my needs for 8 weeks of money without a job. Once you have that amount, then start paying off your loans.


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## RBull (Jan 20, 2013)

Lots of differences of opinions here that reflect peoples risk tolerances, zeal for maximizing every penny of interest savings or squeezing returns on investment. 

I'm more of a cash is king person, like HC mentioned. $19K is a lot of debt to take on especially in the situation where only one spouse is working and you have no other savings. I don't like debt and would normally advocate doing everything to pay it off, but think you need some savings first. 5% interest on the car loan isn't bad. I would aim for an emergency fund of six months living expenses= $10,200 or at very least 3 months = $5100. There is nothing like cash to pay bills especially if something happened like losing a job, getting injured etc. This will dramatically reduce your stress in the event of this situation vs building more debt with a line of credit as your emergency funding. I would keep this money in a HISA so it is liquid and principle is secure/protected. After you have achieved this you can look at your cash flow and direct discretionary income to investing long term to achieve your goals, or become more aggressive with paying off debt if the expected investment return makes less sense after tax considerations.

However I would also advocate securing a line of credit while you are working and able to. As MOA suggested you could use this to reduce the borrowing cost of your car loan. This can be a secondary back up for emergencies.


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## protomok (Jul 9, 2012)

I'm a bit surprised at some of the responses here.

The OP clearly stated they have a 2K emerg fund, and monthly expenses are 1700, meaning the emerg fund would last ~1 month. This a no brainer - contribute to emergency fund! I'm amazed anyone would recommend investing or relying on a LOC...will that LOC still be available if the economy tanks? Will interest rates stay low forever? So many things could go wrong, put the money in the emerg fund...at least until you have a 3-6 month safety cushion.

I think the concept of "risk-adjusted return" is overlooked by too many folks. The (tiny) reduction in interest or potential investment return is worthless when factoring in the amount of risk that comes with it!


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