Why You Still Need An Emergency Fund While In Debt

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I write these for my Soapy and all the Soapys we have in our own lives. She was wondering if she still needed an emergency fund while in debt.

You can read part of Soapy’s briefing here:

Soaps is one of my best friends. She is a remarkable person and a free-spirited, creative genius. My Soap is the daughter of a very affluent multi-millionaire family. Her childhood was what one would call pure opulence. Today, she is in her 30s with a drinking problem. She has terrible health and cannot hold down a job.

Read the previous posts in Soapy’s Odessey:

21 Frugal Pantry Staples List on a Limited Budget

Practical Budgets For People Bad With Money

How To Effectively Overcome Credit Card Addiction

3 Signs When Frugality Isn’t Worth It & What To Do

Why The Rich Are Frugal Even When They Don’t Have To Be

Soapy recently addressed to me that her financial issues were no longer caused by overspending. That is good news!

“It’s not that I’m buying $12 bags of SunChips or cans of RedBulls. At the end of the month, I get most of my bills paid off. It’s the stuff that always comes up. Like last month, I lost my iPhone in the supermarket and had to replace it for work ASAP. Or a few months ago when I fell off the motor scooter and fractured my collarbones. I was gone for 2 weeks from work.”

The two weeks she was out of work, she had to hustle and borrow from friends in the remaining month to pay her rent on time. Her rent is $800 a month for a single room. Her living expenses are constant enough. She has no car and rides with friends. The loan repayment amount on her monthly debt is $700 and she owes a total of around $80,000.

I wrote back to her, “Your situation is basically what an emergency fund is for. Waaait…didn’t you ever make one?”

“Noooo I have a sh*t ton of debt.”

“You still NEED to build one, RIGHT now. Pay the minimum on your debts until you set up an emergency fund.”


“Because I can guarantee with your medical track record, something is going to go down before that $80,000 is paid off.

What is an emergency fund?

An emergency fund is for life’s mishaps. It’s for medical emergencies, unexpected family obligations, employment loss, home and auto repairs, so on and so forth. Emergency funds are all cash and it sits in your bank as cash reserves.

In most cases, an emergency fund is not applicable for a “once in a lifetime road trip with friends” you haven’t seen in years. It’s invisible, untouchable money until a real emergency. Real emergencies scenarios can include an unexpected rent hike or repairing your car so you can get to work.

Why do you need an emergency fund?

1) It’s a step in the right direction.

It’s a mental thing. The more cash reserves the stronger the financial safety net becomes. If you don’t have an emergency fund then you are at the mercy of life. There are a lot of setbacks possible when you are as exposed as you are. Most people hate being controlled so think of the emergency fund as a mini “F-U” money. You get a little taste of what it means to be free from the perils of always having no money.

2) Avoid worst debts

Avoid adding more charges onto your credit card, tapping into retirement accounts (tax penalties) and borrowing money from family/friends.

You did most of these during your plights of apathy Soap. If you had a retirement account, you would be in even deeper trouble with the taxman and they won’t notify you until it’s due. That should be argument enough for an emergency fund, debt or no debt. Your emergency fund will prevent you from taking out other forms of debt that are much worst.

3) “My debts have X% interest though!”

Don’t dollar and dime for your livelihood when you’re this close to the edge Soapy. This is not the time to be haggling with your money.

If something does come up, I guarantee you will be thankful that I told you to build an emergency fund. The emergency fund can give you some form of security.

Remember how miserable and helpless you felt when you were just laying in bed for 2 weeks? It would have been better for your depression if you didn’t have to wonder about having a place to live after the month is up.

The best part of financial health is being able to feel safe and confident in a worth full of mishaps. When stress levels are down, you will bounce back with less anguish.

How much should be in the emergency fund?

Reasonably speaking, an emergency fund should cover your basic expenses for 3 months.

Soap – “Bish I can’t get through the month and you want a 3-month emergency fund from me?”

(Real friends get to use the B word without ramifications, just sayin’.)

That’s a personal thing usually but Jared and I try to keep a 3-to-6 month reserve in cash at all times. That’s why we were slowly converting into treasury bonds, so the cash could pace with inflation.

Everybody has different expenses. Most of the time, I say a must-have emergency fund should be $1,000 to $2,500.

Soapy, your loan payments are $700 a month and your rent is $800 a month. I would say you should have $1,000 as the preliminary, first line of defense.

Numbers. This is so confusing.”

Save up $1,000. Have it sit there in the bank, all cash and forget about it. If you touch it for anything stupid, I’ll kill you.

(Real friends get to threaten your life without ramifications, just sayin’.)


After you save up the first $1,000, go back to paying off your high-interest debt like nothing happened and that $1,000 never existed.

How to estimate an emergency fund amount?

It doesn’t mean you stop saving after building the first line of defense emergency fund. Continue living like you’re…um, me… extreme frugality woo.

Related: Find More Ways to Make More Money From Home on My Sister Blog!

In other words, that $1,000 is more like the first line of defense emergency fund. The official emergency fund comes with at least 3 months of expenses intact. Pour earnings into paying back all debts and loans but reserve some extra money at the end of the month until you have a 3-month emergency fund. Calculate an emergency fund by tallying up critical monthly expenses like housing, food, transportation, debt payment, and utilities.

In Soap’s case, she needs $2,800 to get by per month unscathed for housing, food, transportation, debt, and utilities. A 3-month buffer would then be $2,800 x 3 = $8,400 for her real emergency fund.

If another person has $10,000 worth of high-interest debt but can knock it off in a few months, I could just say hurry up and kill it after the first line of defense is up.

But Soapy has a high debt load at $80,000 and a ‘not so stable job’ so that’s my advice for her situation. Her mother cosigned for her and now her debts are consolidated to under 9%. I am projecting a 3 year pay-off period on the current timeline before she will have a positive net worth.

Readers, does Soapy really need an emergency fund? What about a 3-month one? Have you ever needed to use your emergency fund?



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