Client Case Study:  Student Loans vs. Emergency Fund

 

When is paying off debt as fast as possible NOT a great idea?  When you have no emergency fund and are facing a layoff.

 My client Sam* was torn between paying extra off his student loans OR saving that money in case of an emergency.  He was leaning toward  making the big student loan payment, since he had a 401(k) he could tap into for cash if he needed extra funds. 

We discussed the fact that every time he takes cash from his 401(k), he’s increasing his tax bill, losing 10% as a penalty, and reducing his ability to retire one day.  As we talked he realized that if he paid extra money toward his student loans and then got laid off, he then wouldn’t be able to pay the minimum payments if he didn't have cash on hand.  But if he saved that money instead, he’d be able to use that cash to make the payments in case of a layoff. 

And of course there's nothing lost – if Sam isn't affected by the layoff after all, he can make the big payment toward his student loans then.  It would mean a tiny bit more in interest, but that's a small price to pay to know he's covered in case he's affected by the layoff.

If you have a friend who’s trying to decide where to focus financially and needs some help deciding, connect us so we can schedule a free twenty minute call.

*Client name and some details have been changed to protect privacy.