Chapter 10. Create an Emergency Fund

In early 2009, I met a lovely couple in their early fifties who were struggling with more than $20,000 in credit card debt. When I visited them at their home in a Chicago suburb, it was obvious that they weren't profligate spenders; their home was modest, and they said that they hadn't taken a real vacation in years.

Rather, their credit card problems began once their children started college. Although they were able to cover the tuition costs and typical monthly living expenses with their salaries, their monthly outlay on those two expense categories left no room for error. As a result, they began charging unexpected expenses like car repairs and veterinary care on their cards, incurring exorbitant interest fees along the way.

They were clearly troubled about having dug themselves into such a deep hole, and they were eager to do everything that they could to pay off the debt as soon as possible. We discussed various ideas for reducing their financing costs, such as transferring the debt to a home equity line of credit or borrowing from one of their 401(k) plans, both of which are preferable to high-interest credit card debt.

What I think surprised them, though, was that I didn't suggest that they put every extra penny toward paying down their debt. Rather, I urged them to simultaneously set up an emergency savings fund. True, setting up an emergency fund would probably mean that it would take them longer to pay off all of their debt, but it would ...

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