Wednesday, May 25, 2011

The Emergency Savings Conundrum

Earlier I posted that my van had lost the transmission.  At the time I paid for it with a credit card.  Now the bill for the credit card has arrived and I have a decision to make.  Looking at the big picture I have two options.  The first option is to raid my emergency savings fund and payoff the the outstanding balance.  The second option is to make payments until the loan is paid off. 

My concern is tapping the emergency fund for such a large amount.  What happens if something even more catastrophic occurs.  In my mind it seems like a better idea to payoff the loan over time while maintaining the balance on the emergency fund.  But then I think that I should payoff the loan and replenish the emergency fund over time. 

The expenses associated with the transmission problem along with additional work done to the van once I got home would take a significant percentage out of the emergency fund.  Thus my conundrum.  As I waffle on this issue I look at points of financial impact including.

Likelihood of loss of earnings
Possibility of reduction in earnings
Cost of interest on the loan
Near future budgetary concerns
Moving the loan from a credit card to another loan vehicle

Ultimately I have decided to raid the emergency fund to payoff the loan.  But anyone facing a similar conundrum must take a look at their own situation and consider the different variables as they relate their situation.