Would you ever gamble with your personal finances?
Is there room for informed risk with your family finances if you feel the cards are stacked in your favor?
I expect to get completely slammed for this but:
I’m thinking about gambling a little with our financial future…
While in debt do we need/should we have a LARGE emergency fund?
There is a delicate balance between saving money for emergencies and getting out debt. It’s a race against the unknown. You try pay off high interest debt as quickly as possible, all the while saving money for the inevitable little emergencies that are certain to pop up along the way. Therein lies the catch-22. The more debt you have, the more emergency savings you’ll need to keep up with your debt payments if a BIG emergency such a a job loss loss occurs.
Next month, barring any major/minor catastrophes, we will have $1500 in the emergency fund. At that point, I’m not sure whether I want to keep adding to the fund our use the monthly amount I would put towards the emergency Fund and instead put it towards paying off high interest debt.
Is a $1500 emergency fund enough?
Why in our case I think may be:
My husband’s job will end at some point (the company has been ‘in liquidation’ for over 9 years) but senior management has assured him his position secure for at least another year, probably 2, maybe even 3. They need him to keep working at his job TO MAKE his job obsolete – how’s that for another catch-22? When the company does finally close, he will receive an extremely generous severance package (including paid medical coverage). Companies with similar dire financial positions have implied they would love to have him when his company finally does go kaput. (It seems he may never work for an actual viable company but someone has to clean up the mess of the imploded businesses these days.)
The experts recommend 3-6 months living expenses. But saving this amount would prolong the debt and greatly increase the interest amounts we pay. It would split our focus, and I feel the severance package and the $1500 in the bank is enough for the one year it will take to pay off the credit cards.
Is this plan too risky?
Possible Outcomes of my Gamble – Would you put your money on RED or BLACK?
GAMBLE ON RED: $1500 Emergency Fund – earmarked emergency money now goes towards Debt
Worst Possible Outcome of betting on RED:
Over the course of the next year every appliance breaks down, someone gets so sick where we must meet the $500 deductible, a tree falls on the house. We have used up the $1500 emergency fund. If another emergency occurs we must resort to using a credit cards because the emergency expenses have outweighed the fund balance. This possibility exists , although I believe small, and we are right back where we started.
Probable Outcome of Betting on RED:
Next month the emergency fund has $1500. We roll the money we are currently adding to the emergency fund amount towards the high interest credit card debt. Throughout the year, the house needs $500 in repairs. An appliance kicks the bucket – $500. One or two ER visits @ $75 each. All covered by “$1500 emergency fund.” In March 2011, the credit cards are paid off. At this point we have freed up a tremendous amount of discretionary income, and are no longer beholden to outrageous interest rates and can reassess “the plan”.
GAMBLE ON BLACK - keep adding towards emergency fund/diverting money from debt until at least 3 months income is saved.
This really isn’t a gamble. It’s the safest possible choice. I would assume most people would recommend this plan. But it is also the most costly – both in money and time to be debt free. (It would take us close to 10 months to save up 3 months income.)
I hate casinos, the few times I’ve been in one, I put a $20 bill in the nickel slots. Cash it out and physically place a single nickel in an old-school one-armed bandit. I milk that single $20 for as long as possible. So it’s not like I’m some adrenalin freak who can’t function without taking risks. But I’m leaning toward betting on RED. The risk feels calculated. The odds seem to be in our favor…
Would you take this gamble?
Suburban Dollar was kind enough to host “The Carnival of Money Stories” this week. Check out his “Final Four Edition” with some great reads, including one from me.
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March 31, 2010 at 7:10 pm
I’m fiscally conservative so I have to say Black. You really never know what can happen. A large tree did fall down in front of my house not long ago & my basement flooded from the heavy rain! Nobody plans for these things, it just happens…
March 31, 2010 at 8:30 pm
When we made this bet, we took red. Yeah, I’m a rebel! But part of the decision was the understanding that with our cashflow we could have changed course in short order. We had no e-fund while we buried ourselves in debt so I didn’t see the need to have one while we dug out.
April 1, 2010 at 8:17 am
As you may know, I’ve struggled with this challenge, although I’m further behind in saving for an emergency fund than you are.
I think you’re playing with significant risk here. I’d recommend sticking with a modest amount toward your emergency fund, while still putting a good chunk of your cash toward debt retirement.
Would $100 or $75 a month toward your emergency fund derail your debt retirement plan that much?
Here’s why I suggest you shouldn’t gamble.
a) You already called it a gamble, which tells me you know it’s risky. Why play a risk card with your family’s fiscal security?
b) Sounds like hubby works with companies that are somewhat troubled. I recently met a woman who worked over 10 years for Nortel. Was very senior. Did much of what it sounds like your hubby does, made herself dispensable. They promised the Nortel workers pensions, etc. One week most of her team took the buy-out package. The next week when she did, the pension money was gone. No pension. No severance. Nothing. Nudda. Zippo.
Does your husband’s company intend to keep their word about paying a nice severance with medical coverage, etc? Sure they do. But crap happens. It happens to people you probably already know. How will you keep your family immune to the crap that life will bring?
c) What if, heaven forbid, somebody in your house gets sick. Sounds like you have some good medical coverage, which is great. But that’s not the end of the bills. I can tell you from experience, when my daughter has been hospitalized, my costs skyrocket. I don’t pay for hospitalization (because I’m Canadian), but if I’m in the hospital every day for weeks at a time, and paying for parking, or paying for meals out, or paying for special needs for my family, or paying somebody to fill my shoes at home…it adds up – FAST.
d) Sounds like hubby is very employable – and that’s fantastic! (Sounds like you both made great choices in partners!). It’s still a crappy economic environment, despite his talents, I still see lots of talented people out of work. Having just gone through a process where I was hiring for my company, I said “no thank you” to some very highly skilled talent. Only had one position available.
If hubby was in that position, what guarantees do you have that he’ll be “the one” when another company is hiring?
e) You mentioned your credit card debt would be retired in March 2011. You’re not hoping to use that credit again if an emergency arises are you? That’s not an emergency plan – I know you know that. Once your emergency is over, you’ll be in debt again. I know you want out. A line of credit (even at zero) is the same thing, it’s not an emergency fund. Cash in the bank is a plan
I’ve struggled with the same demon, and I’ve decided to stick with putting something in the emergency plan. The amount I’ve allocated for myself isn’t enough to make a dent in a minimum of 3 months worth of expenses, but everything starts with a dollar. So I’ve started. I’ve seen divorce, end of another relationship, critical illness, and job loss. I know that a few of those things have contributed to the debt I have now.
Think of how proud of yourself you’ll be when you set up an emergency fund and then leave it there. Won’t you sleep better?
This financial business isn’t easy, is it?
April 1, 2010 at 12:36 pm
I would take the bet on Red scenario. I think your $1,500 EF is a good start. If you can truly pay off your debt in one year from now, you’ll be looking financially terrific. Then, you could really beef up that EF fund. Your current EF fund should be able to cover any emergency that pops up over the next year. Good luck and let us know which option you choose!
April 2, 2010 at 2:07 pm
If it were me, I’d go with the Red option…
While this is against the standard personal financial advice, I think the probabilities are in your favor. Especially since other businesses are already knocking at your door with job opportunities for your husband.
Good luck to you, whichever way you go
April 4, 2010 at 7:04 am
[...] at Home Mom CFO wrote about Gambling and Emergency Funds. She is deciding whether to risk letting her emergency fund freeze at $1500, and use extra money to [...]
April 11, 2010 at 1:06 pm
I’m a terrible gambler because I always want to split the difference and share out the risk.
Here’s the thing that concerns me about betting on red: the protection against falling back into debt that you’re relying on is actually dependent on the company truly paying out a generous severance. Is that in writing and enforceable? Are you in a position to pursue enforcement if it didn’t happen?
If not, you’re really just relying on your $1500 cushion. That may not be a bad thing for your family – how long would that last you? That amount would give me hives from personal experience with putting out familial financial fires because I know that our emergencies tend to run in the $2000 range (or did) and then I’d want at least another $1000 as more just in case money.
I’d seek the middle ground where you continue to commit up to $3000 in the emergency fund. I know it’s opportunity cost lost against the debt, but you have to consider worst case scenarios when you’re evaluating risk so that you know what you’re accepting.
June 6, 2010 at 6:19 pm
I would go with red. Yes, if the worst happens, you would have to rely on your credit to cover it. And what you didn’t mention is the possibility that your lines of credit would be cut, so that if there was an emergency, you wouldn’t be able to cover with your credit. I think that is the real risk of red.
However — you have a fund and will be able to cover some emergencies. If you direct the extra money to your debt, then you will decrease the amount of interest you are going to have to pay overall. So say you pay off an extra $1000 over the next 6 months, but then an emergency hits and you have to put that $1000 back on credit. At that point, your debt will be slightly less (due to paying less interest) than it would have been if you had put the $1000 into your savings account instead and then spent it out of there, not using your credit. Unless you personally feel that you cannot handle using credit at all, I would definitely put it on the debt.
Disclosure — I have so much debt that I am basically throwing everything I can at it, and I don’t have an emergency fund, although I do save for known (eg property tax, insurance) and estimated (eg car maintenance) annual expenses.
Good luck!