Emergency Funds in your 20s?

April 13th, 2008 · 10 Comments · Debt, Savings

Do you need an Emergency Fund in your 20s? Maybe. This doesn’t sound like advice I would normally give right? But here’s the deal.

Most 20-somethings are in debt. They either have student loans, CC debt, or car loans. And in most cases these loans are way more than the interest given on a savings account.

So the way I look at it pay off your debts and let the EF go for awhile. Instead focus on the CC and car loan. And yes I realize some responsible 20-somethings have absolutely no debt. I wasn’t one of them, I had a student loan, car loans.

And it worked out. Because of the focus on debt, I had very few emergencies. And if I did, I plonked it back on the CC and never paid interest. But I also paid off my debt at the end of the month, so I always carried extra on hand. Basically I worked and still do 1 month ahead.

I pay all my bills mostly at the beginning of the month, paying the miniums are the beginning of the month. Then at the end of the month I again pay all my bills, but the expected extra from the month was applied to debt. This method CANNOT work for people who pay off debt ASAP. They leave no room in their budget for emergencies. But this method causes you to hold your paycheck until the next paycheck comes in.

But I’ll explain more about this cash in hand theory later. For now, my reccomendation? 20-somethings with high interest debts, don’t bother with an EF. Focus on paying off your debts instead. I’ll also discuss whether a 401k match is worth passing up later.

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10 responses so far ↓

1 Hilary // Apr 14, 2008 at 3:38 am

I’m little confused here, it seems as if you actually have an emergency fund in your “cash in hand” sort of explanation here.

That aside, I disagree with your idea of not having an emergency fund for several reasons (not all apply to every person):
- If you need your credit cards for emergencies then you can’t cut them up.
- Some people will be tempted to use credit cards for non-emergencies simply because they aren’t cut up.
- You need to get out of the habit of using the credit cards as a crutch and instead rely on money you have in the bank.
- People get more creative when they can only use the money in that emergency fund when they actually have an emergency (if the fridge breaks beyond repair your more likely to buy a slightly more expensive one on credit than if you had to dip into an emergency fund.)
- Creating the emergency fund can be the beginning of the good habit of saving.

Age shouldn’t be a factor here either - I can’t quite figure the rational on the “under 30″ aspect of your post. Unless maybe you are somehow assuming that people under 30 don’t have kids … but even then that’s not really a good excuse for not having an emergency fund.
2 LivingAlmostLarge // Apr 14, 2008 at 3:43 am

Most people under 30 do not have children or families to support right out of college. They are also more likely have to a lot of student loans, credit card debt, and car loans.

I would not give the same advice to people with families. Nope, I don’t reccomend using credit cards for people, however in case of emergency you can use them.

Also instead of credit cards just use cash. But I don’t think that EF are necessarily useful when you are paying 30% interest on a CC.

So you have the CC on ice, and you have no EF, if an emergency comes up put it back on the cards or use the cash in hand. And it’s sort of an EF, but it’s not really. At most it’s 30 days. And EF might be sitting there while you are accuring interest.
3 Hilary // Apr 14, 2008 at 4:08 am

I was actually thinking $1,000 EF not the 3 months of living expenses type of EF. Plus if you have an interest rate of 30% I would definitely call and ask for their hardship program or a rate reduction to get that interest rate down. If they won’t and you own a home you should look into a HELOC or even a second mortgage to pay off your credit cards if your interest rate is that high.

If for some insane reason your student loans interest rates are that high, I would look into the terms on that and possibly take just enough credit hours more because some come with the stipulation that if you go back to school they will go back down to 0% (some with only one class which would be where this would be beneficial.)
4 Cinder // Apr 14, 2008 at 1:04 pm

Anyone that needs to pay bills every month that are required to be paid with cash funds should have an emergency fund, whether in debt or not, regardless of age; at least in my opinion.

The reasoning is simple - what do you do if your income stream quits flowing after an unexpected job loss? Pay your mortgage (or rent) and bills late, after spending two-three months looking for a new job? (likely enacting universal defaults as well as killing your credit score, or even getting your evicted if you’re a renter)

Emergency funds (rather, savings in general) are a neccesity to be financially responsible and a must for anyone who cares about their long term financial viability.
5 Fabulously Broke // Apr 14, 2008 at 4:57 pm

Yup. S’what I’m doing now

Except I just keep $1000 in EF just because I’m a bit nervous if I don’t.

Plus it makes me feel (psychologically) secure… and I have about $17,000 in retirement funds… and the rest = debt repayment
6 Livingalmostlarge // Apr 14, 2008 at 5:28 pm

Cinder, how large an EF are you talking about? If it’s $1k, that’s not going very far. It won’t pay a month of rent.

Hillary, I reccomend paying off student loans last. After a car note, credit card debt, and other loans (personal and private). Reason is usually the rates are lower, but not always. And it goes away in case of death.

As for job loss, well if you are in debt I think you are better off paying for the credit cards, car loans, etc and not having much of an EF. When things happen go back and use them. The interest rates are usually high enough that it will make a huge difference than sitting on 2-3 months of expenses (if that’s what Cinder is suggesting).

If Cinder is suggesting like Hillary a $1k EF, what’s the point? $1k won’t cover even one month rent.

So my question to Hillary and Fabulously Broke, what is the point of $1k EF? I mean if you have rent that much or more?

I know Fab’s budget and it’s a bit different because she lives at home and “rents”. If she lost her job tomorrow, potentially her parents would kick her out, but maybe not as quickly. I could be wrong however.
7 krystalatwork // Apr 14, 2008 at 6:19 pm

I’m 25, and currently have no debt. I’m re-building my Emergency Fund after I drained it when I lost my job in the fall.

I had been debt-free for about 6 months when I lost my job. But I had built up the majority of that EF while I was getting out of debt (high interest CC and student loans - about $20k). I did it because if an emergency was to happen (like losing your job), I didn’t want to go into even more debt. And I wanted to make sure that I was entering into a debt-free world prepared with every advantage I could scrape up.

Of course, getting out of debt was my main concern, but I did manage to throw money into my EF account every pay cheque. And if I hadn’t done that? I wouldn’t have been able to survive 2.5 months of being unemployed. And instead of telling you that I don’t have any debt right now, I’d be telling you that I’m trying to dig myself out of debt because I didn’t have a proper fall-back plan in place.

Emergency Funds are for everyone, regardless of age, income, or any other variable.
8 Cinder // Apr 14, 2008 at 10:19 pm

I’d suggest 3-6 months of take home pay, $1k isn’t going to do a whole lot in a true emergency (like losing your job).
9 Mrs. Micah // Apr 15, 2008 at 2:22 am

We have a little one which is intended to cover things like the insurance deductible if the car gets hit, etc. I’d be more comfortable with more…and as paidtwice wrote today, everything is an emergency fund if it comes to that.

Eventually I’d like to have some living expenses saved up, as much for peace of mind as anything. And to avoid debt at all costs…including that of not getting ideal returns on our money by putting it in a high-interest back account instead of investing it.
10 Hilary // Apr 16, 2008 at 2:00 am

With $1k it’s NOT about replacing income that comes with job loss - it’s about dealing with those unexpected other problems. If the fridge breaks beyond repair you’re not putting it on a credit card and paying interest on it. If your car breaks you have the cash for a new alternator. Yeah, you could be put it on the credit card but you’re just backsliding every time you do that.

If you lose your job and all you have is $1k in the bank you might be inclined to deliver pizza.

Also, if you lose your job at least $1k will make sure you can cover the minimums. Then again I guess you could take out a large enough cash advance to pay the minimums but how much would that cost you in the long run?

Oh, and if you lose your job and you aren’t willing to deliver pizzas or some other lowly job while you look for real employment then I would consider the 3 months of living expenses in a savings account. If the industry you’re in is hard to find a job in then maybe 6 months.

If you’re always paying for emergencies with the credit card then it’s just backsliding over and over again. Are you going to be able to eek out an extra $1,000 in 30 days to cover what was spent on the credit card? Then you’re paying interest on that anyway so your logic about it sitting in a savings account not making enough in interest to cover your losses by not paying down that amount on the credit card are somewhat negated. It might not break even on a balance sheet but that’s also going to depend on your situation and including if you would do cash advances to cover mortgage payments if you lost your job.

The 1k is primarily a safety net for the various little things that inevitably happen in life - things that cost more than the change we can find in the couch cushions or the car ashtray.