Looking out for myself [Preparing for the worst]
I was chatting with a coworker today about our current contract and our prospects once the contract ends in March.
My coworker said something interesting. Basically she told me I should just look out for myself. While we’re both happy with how our company has treated us, we can’t rely on its good graces if they just don’t have another contract for us if this one ends. I’ve been lucky that I was “placed on the bench” (paid to not work) twice during my 2.5 years with the company, but that was because they were waiting for a security clearance to complete or contract to start both times.
And while I’m a federal contractor and the government is always spending money, I can’t expect that we’ll continue to win contracts that fit my skills.
Since I’m the main breadwinner in our household (i.e. we can live on just my salary, but not on Stacie’s), I need to have a fallback plan. “Most experts” (who are these experts?) say you should have 3-6 months of basic expenses in your savings account to hold you over while you search for a new job. That means I would need $15,000-$30,000 in savings, depending on what I consider a “basic expense” and whether I have 3 or 6 months in savings.
Right now, we have about $20,000 in cash savings, so we’re above the minimum already. But now I have to consider something else. I’m just thinking about my own job loss, but Stacie would still have a job. There’s a pretty low chance that we would both lose our jobs at the same time since we’re in different industries (federal contracting vs healthcare) and the DC job market is still relatively strong (again thanks to the government).
Stacie’s take-home pay would cover our mortgage, and my website income would cover most of our remaining bills, so we would barely dip into savings. So I’m at the crossroads of deciding whether we should bump up our emergency fund or pay down debt further. Just a few years ago, I was a bachelor with about $100 in the bank and nary a thought about my financial stability if I lost my job. But now I’m a married homeowner who has more than his own well-being to consider. I’m sure if I asked Stacie right now, she would say “SAVE SAVE SAVE!!!”, but that’s just her personality (which I’m thankful for).
The one problem with trying to use logic to determine whether to save in case of emergency versus pay down debt is twofold:
1. “Emergencies” are risks, and the probability of the risk occurring is mainly an educated guess at best (regardless of how much math I do to calculate it, there’s always unknowns in the equation).
2. It’s hard to quantify “safety”. While I can calculate the amount I would pay in interest on the debt I don’t pay off, and I can quantify the amount of interest I would earn on savings, I can’t calculate the benefit of having a bigger emergency fund…unless the emergency happened and I didn’t have that fund.
So while I battle logic and emotion, I’d like to hear your thoughts on building up our emergency fund versus paying down debt. Let me know what you think in the comments!
I believe in the goal of having a year’s salary (of whomever makes the most money) in the bank as an emergency cushion. You can’t believe how much better you will sleep at night!
I saved two years’ salary to live on while I went back to school fulltime (paying cash, no loans!) to complete CPA requirements. During that time, I had an emergency room visit that would have cost me $10,000 if I had not had health insurance, but I still had to come up with 20%. Last year I also had to replace my 10-year-old Saturn with a one-year-old Toyota, which I paid cash for, which had a big impact on my savings.
I have 18 classes left before I am finished and am at a point now where I am considering taking money out of my IRA to pay tutition for the remaining semesters of school. Part- and full-time work was scarce last summer and I barely worked at all. I figure I can use IRA money without penalty (though will owe taxes) and reserve my remaining available cash for any more emergencies, food and health insurance premiums until I graduate and get an accounting job.
We’re trying to balance both. We currently have 6 months expenses in our emergency fund. I’m paying an extra mortgage payment each month to pay down that debt. We’re still funding our emergency fund though, trying to build it up to 1 year. By the time we have 1 year though, we should have our mortgage paid off which will them make our emergency fund last much longer, perhaps 2-3 years. We are also self-employed so we have an emergency fund for our business as well. We’re in the process of building that up to 1 year of running expenses.
Well, paying down the debt would be like saving in that
(1) you would have saved yourself additional interest charges and (2) you would free up more credit to use in case of a dire emergency. Yes, it would suck to have to put an emergency room trip, new car engine, what have you on a credit card, but you COULD. Whereas your debt it not hypothetical, it is a reality, and one that is costing you more REAL MONEY than you could be making in interest.
I haven’t been reading your blog long enough to know if you guys already have children, so forgive my ignorance here. But what happens if your wife gets pregnant (presumably by you)? What if she wants to stay home with them? Kids are expensive as I just found out a year and a half ago and we had twins. It was also around that time that we began a dedicated effort to eradicate as much debt as possible which meant paying off over $10K in CC debt and my student loans. We now have about 6 months expenses saved and we want to bring that up to a year. We are very anti-debt and have strived to pay off everything we can (just a couple grand left on my truck). We were also fortunate that while my employer of three years up and laid off a bunch of folks, knowing I had several months in my efund made it a lot less stressful than it would have been. It was pretty easy for me to find a new job (which included a significant pay raise) but if I weren’t so awesome 😉 I would have been stressing out a lot wondering where my next paycheck would come from and how I was going to pay off my creditors.
PAY OFF THE DEBT!
Well, I have to preface this by saying that I absolutely hate debt. It makes me nervous as hell.
But I think you should save more rather than pay down your debt.
Here’s why: Once you find out about your contract status, you can always happily chunk down some funds on your debt. But, as Liz Pulliam Weston points out, once you pay down debt, the money’s gone.
If you’re talking about credit card debt, at least you’re freeing up credit to fall back on in bad times. Although with the stories of people getting their credit lines slashed, even this is a little risky at times.
You should concentrate on preparing for the worst case scenario: That is your unemployment. (Also, while I think you’re right about it being unlikely that both you and your wife would be laid off, I would try not to assume anything in this economy.) You want to have money available to pay bills. So if you’re talking about paying down car loans or any other kind of funds that you can’t re-access, I would stall that plan for awhile. At least until you find out what is going on with your work.
Hard to tell without knowing the form of your debts, the amounts of the minumums, and the lengths.
If you have a debt that is a huge monthly payment, but could be gone within 6 mos/yr, I’d try to pay that one off. The reason being, that’s one less huge minumum payment you would have to be making on limited income. If you don’t have one like that, then forget this advice.
Since you have the savings, (nice Amount, by the way – congrats!) and would have the mortgage and most of the bills covered, I’d say pay off what you can while you can, IF it will eliminate a major monthly payment.
Looking at your 3 months need, I just have to say that that’s more than I take home in pay for all year….. so looks to me like your expenses are pretty high. Anything you can do to bring down your monthly payments would be a great thing! You might want to plant a garden also – or edible landscaping… You’d be surprised at how much money even a tiny garden can save you over the year!
Is there anything in your budget that you can do without? Extra channels, memberships, subcriptions, cut down eating out?
I have to tell you that being debt-free is the best way to be – so keep trying, set your goals, work on them, and eventually you’ll make it there! My house, car, and pickup are all paid for, I have NO debt, and my bare budget ‘have to have’ money is under $400 month, including property taxes and insurances…. Once you get to that level of non-debt, you really will sleep better and be soooo less stressed about the layoffs! Plus you are able to work less hours and still get by, but have that time to enjoy life! The simple life is great! Good luck on your goals!
I agree completely with Abigail. It’s unlikely that you’ll be cut loose in mid-contract, right? So right now you have job security until March, and if you get a new contract, you’ll have security for the length of that contract? If that’s right, then build up your savings for now. Then if/when you get a new contract, use a chunk of your savings to pay off debt, and build them back up again over the length of the contract. And so on.
@All, thanks for the detailed suggestions.
@Marci, our expenses look high because we have a high mortgage (compared to more rural or suburban areas of the country). Our mortgage (interest-only, discussed in a prior post) is over $2000 a month. We have bare cable that we could ditch for $20, internet for $40 (although I would argue for keeping it because it’s how I make money on this site), and dining out ($200/mth budgeted). We don’t really have many big discretionary expenses.
As a note for all of you, the only two non-mortgage debts we have are my student loan ($200/mth) and truck ($450/mth). You can see the remaining leftover debt amounts in the sidebar. If times were tough, I could sell the truck (I owe less than it’s worth) and defer the student loan.
I would put savings ahead of debt on the basis that you can always put a chunk of money into the debt later on – looks like that’s a popular position. It sounds like you have several different options in the event of a long-term layoff so maybe build the savings up to the higher end of the range and then tackle the debt again.
lol @ Chris
I was trying to come up with a delicate way of saying that, and you hit the nail on the head.
Switching to coins makes me picture girls dancing around wearing only a change purse.
I agree with Heather. Instead of creating a traditional e-fund, paying down your debt in effect does the same thing, while saving you interest you would have accrued by leaving debts unpaid, and freeing up more credit in case of an emergency. The only things you might need a bit of cash on hand for is to pay rent, and minimum balances on credit cards until things turn better.
I’m not sure if you should take my advice since I’m not in as good a shape as you, but being in a similar situation where my job seems on the verge of being lost every other month here is what I would do.
Save the money (if your emergency fund is NOT completely liquid then save it in a separate place).
Why? Because as you stated you already have an emergency fund that can withstand you OR your spouse being out of work for multiple months and because the non-mortgage debt you have right now with a car loan and student loans are not that bad. Times are very uncertain, if you sock away this money from now till March and you go on to find another great contract paying = or more than this contract than great, use the money to pay off debt then. But if you don’t you will have some cash outside of your main emergency fund to help you with a job search, or cover that car payment while you look for new work.
Another thing I have been trying to do while still employed (and maybe this doesn’t apply to you, but could for others) is make sure I have a professional wardrobe for interviewing and a few other nice outfits (while I still have the steady income) and working on interview skills. SO I have a step up if it happens.
As Ben C said, if you are a bit prepared financially and mentally, a layoff doesn’t have to be as big of a stress as it is for people who are unprepared. I’m trying to become prepared, but if it happened tomorrow I would not be ready.
Save it!
I am always curious what people consider a “qualifying event” to dip into emergency funds. Since I have such a small fund, enough to replace just my income for about 2 months it is pretty much reserved for job loss only.
I did raid it for a medical bill early in 2008 but built it back up to where it was before within a few months.
What would make you dip into your emergency fund? Do you have an spoken or written rule about when to use it?
Thanks to all for your advice. I’ll put together another post with more info (since I made you guys assume a bit too much) and to let you know what we’ll do.
@Danielle, I would only dip into it for a true emergency like job loss. I would want to minimize the use of credit as long as possible because I would end up carrying a balance and paying even more than needed. If i can cover it with cash, then I’ll do so.