There are a couple of things that could derail my plan, the first being unexpected expenses that will require me to re-fund my emergency fund any time money is used for emergencies. And I know they happen. Just a few months ago, we had to cough up an auto insurance deductible. I expect appliance repairs will come around at some point also. Our truck needed a new $100 plus sales tax battery unexpectedly just this month.

We’re at a point where we still don’t have the funds to fully fund any repair and maintenance categories in our budget. Frankly I’d rather not anyway. I’d rather just have a larger emergency fund for those kinds of things, but that’s just me.

I’ve been reading a book that I’m find quite eye-opening when it comes to organization and planning, and I’ve decided there’s definitely a point where we reach diminishing returns on our investment in pre-planning and over-organizing everything, including finances. A Perfect Mess is all about how some disorder and mess can benefit our lives… I agree.

No matter what decision you ultimately make, you’ve had to make a tough choice.

These are actually quite minor choices when compared to the choice I’m talking about today.

I’ve been struggling with the problem of how to decide what’s most important to me and my family: pay down debt or save for emergencies.

I realize how important it is to have a substantial emergency fund to tide you over when you’re trying to get out of debt. But I want to make the most financially beneficial decision I can make for my family, and one pat answer doesn’t seem to fit all situations.

Assuming you’re disciplined enough to follow through on any particular plan you make, you have options other than the standard idea of saving up $1,000 before you start paying off debt (Dave Ramsey’s famous “baby step 1”).

Assuming you have $1,000 of credit available for use in an emergency, and assuming your interest rates on the cards where you’re carrying a balance are on the high side, you can save plenty of interest by paying off debt before you start saving up an emergency fund.

However, that said, there are some things to take into consideration.

1. A cash emergency fund can be used in situations where credit might not.

Say you need to rush your dog to the veterinarian after he’s hit by a car. Your local vet is cheaper and closer, but he doesn’t take credit. A cash emergency fund might be the thing that gets your dog the care he needs for a price you won’t mind paying in the long term. This situation might be a stretch, but then again, I live in a rural area and I know several vets who don’t take credit cards and who need to be paid when services are rendered. The closest “big” city is an hour away.

The way I’ve found to get around this is to make use of the cash I have put aside for my budgeted irregular expenses. Although this cash is technically already assigned a task, in a pinch, it gives me cash reserves to tap into in the event of an emergency where only cash will do.

2. If you can’t repay the emergency expenditure quickly, your emergency will end up costing you interest, which you could have been paying toward your debt.

In simple terms, if you save up an emergency fund in an account that compounds daily at a 1% annual interest rate instead of paying on a debt that compounds daily at a reasonable 7% annual interest rate, you’ve lost 6% of your money to interest payments.

However, if you then have to charge something on a credit card because of a true emergency and it takes you 6 months to repay the money, your emergency has cost you 3.5% more than it would have if you’d paid cash.

Here’s what it looks like in dollars, roughly.

$1000 in the bank + $10 interest earned if you save a cash emergency fund

$1000 less debt + $70 interest saved if you pay debt first

$1000 debt + $35 interest paid if you have an emergency that would have used all your emergency funds and you’re able to repay within 6 months. If it takes you 12 months, you’ll pay $70 interest.

However, if you don’t have a card with a relatively low interest rate, there’s another possible downside. The interest paid on a card with a relatively high rate could be damagingly high.

You could get into a cycle of debt that takes many more months to pay off than you might ever have saved by paying debt before saving for emergencies.

If you pay late, you could be subject to high penalties, usually starting around $39, and your interest rate could jump even higher.

Net savings by choosing to pay off debt instead of saving for emergencies

Here’s a summary of the financial impact of one choice over the other.

Best case

The best case assumes you have no emergencies while you’re paying off your debt.

Pay off debt: Net worth up by $1,070

Save for emergencies: Net worth up by $1,010

Worst case

The worst case assumes you have an emergency that uses your entire “fund” and that you take 12 months to repay your emergency charge.

Pay off debt: Net worth down by $70

Save for emergencies: Net worth up by $10

Somewhere in the middle

Somewhere in the middle assumes you take 6 months to pay off your emergency charge.

Pay off debt: Net worth down by $35

Save for emergencies: Net worth up by $10

My decision

All that said, I made my decision not long after I’d decided to pay off my debt as quickly as possible. I chose to put as much of my discretionary funds toward paying off debt as soon as possible. My irregular expenses savings remains my only cash reserves at the moment, and although I rethink the issue every month or so, just to be sure nothing’s changed that might impact my decision, I believe I’ve made the right choice for me for the time being.

Truly, it’s somewhat of a gamble, but the payoff of getting out of debt sooner than I would have otherwise seems worth the risk to me.

Have you had to make a similar decision? What did you decide? Comments or questions are always welcome.

I don’t actually have the money to pay for the repair set aside in cash. I haven’t got that far in my emergency fund. However, I did have money set aside for the taxes and insurance on my home and since they’re not due until January and February, I was able to borrow from myself instead of a credit card company.

I can’t explain how much stress I didn’t have to deal with for that simple fact. I’ll have to spread my repayment to myself out over the next two months, but at least I had the money and I didn’t have to worry about a lack of funds on top of worrying when the repairman was finally going to arrive.

Even though I don’t have everything I needed stashed away, just having some of it stashed away has given me options I wouldn’t have had in this situation otherwise. An emergency fund is about having cash available to tap when you need it.

Sure, it would be ideal to have tons of money put back for every conceivable cash crunch me and my family could ever have to face, but for most of us, that isn’t always feasible.

Just having enough is enough to take away the worries.

I could say I’m changing my ways and will start to save more for my emergency fund before I continue working to pay down my debt, but I won’t lie to you. At the moment, even after having a totally unexpected expense crop up**, I don’t plan to change my ways.

Right now, debt payoff is more important to me.

I think about it like this: every dollar I save in interest is a dollar I can put into my emergency fund later. If I wait to pay off my debt after I’ve saved some more money, I’ll end up spending more on interest and that’s money out of my pocket. I’m willing to take the risk that I’ll have an unexpected expense larger than I can cover with what I’m saving for other expenses.

Increasing my emergency fund is important to me, but it’ll have to wait until I’ve paid off a few more debts first.

**My refrigerator is less than two years old, and I certainly wasn’t expecting it to die on me quite this soon—but I should have known. It’s GE. Bad, bad, decision and I knew better, but the price and features tempted me against my better judgment. GE has never been a reliable brand for me. In the past, I’ve had a dishwasher kill over just after the warranty expired, followed by trouble with a GE range. Now my refrigerator’s main control board went out after only 20 months of use. See the track record there?

I asked the repairman for advice on which brands had the fewest repair calls and his answer was simple, if a bit of a sidestep of the original question. Buy the model with the fewest electronic add-ons. They’ll get you every time, he said. If you do buy an appliance with a lot of special features, either be prepared for expensive repairs or buy the extended warranty or service contract.

Good advice, but it came a little too late for me.