Get an Emergency Fund
I think it’s always good to remind people to start an emergency fund. Today I do this service for you in the form of a link. Semi-full disclosure: I have what I consider to be about a 5-month emergency fund, with 6 months coming soon. (You can read about my emergency fund travails here.) I am probably on the high side in terms of the $$$‘s in my emergency fund. It might be a better idea to cut it in half and invest the remainder.
On the other hand, I like the security the emergency fund provides. If I am no longer gainfully employed, we will have a place to draw that mortgage payment with minimal impact on our long-term financial goals. If I wish to take some unpaid time off for family reasons, the emergency fund would be a place to go. Is 6 months a bit high? Sure, but if I had to dip into an IRA or max out a credit card in the case of an emergency, I’ll wish I had that emergency fund.
I’m currently struggling with paying off debt. Financially it seems to make more sense to pay off in advance only those loans that are, say, 6% and above. Simplistically speaking, if I think I can get 7+% back from the market while only saving 6% from a loan principal payment, I should invest in the market. However, eliminating loans seems like a good idea (though I doubt I’ll ever pre-pay on my mortgage). If our only monthly debt cost was our mortgage, we could reduce our emergency fund, invest that money, and simply live a little more stress-free. We would be more agile to take some risks that could have negative financial impacts since we are living under a significantly smaller umbrella of debt. That is unless we in turn feel stress because we are not growing our umbrella of investment - investing being the big loser in a scenario where cash flow is severely reduced.
What are your thoughts on eliminating debt?
Another worthwhile tip in the link above is to have some cash stashed in your home. Seems like a good plan to keep your family eating for a couple weeks until the emergency fund truly needs to be hammered.