Thursday, February 26, 2009

Can a Car Purchase Fund Double as an Emergency Fund?

Buying a replacement car is one of our goals in the coming months. Specifically, buying a used, vintage 2003 or 2004 red Solara convertible for under $12,000 is our goal.

This is my first mention of it and I haven't added it to this blog's goal list yet because I want to focus on getting rid of our debt first.

I'm prompted to write this post now for two reasons. The first is my budding case of Spring Fever. Here in the Pacific Northwest (some fondly call it the "Pacific NorthWET"), we anxiously await any sign of drizzly, cold winters yielding to the spring. Once spring is here we know our short but glorious summer is right around the corner. Summer = convertibles. Simple.

I had every reason to believe spring was making her way to Washington State when I awoke to this scene in our back yard this morning:

Bleh! OK, so my first reason really isn't that compelling anyway.

Paying Debt vs. Beefing Up the Emergency Fund
My second reason for posting this is a really terrific article I read today on Frugal Dad's blog. If you haven't read his blog yet, I would highly recommend it. He takes a thoughtful, conservative approach to personal finance and money management issues. AND he offers up some great topics. Which brings me back to his aforementioned post, Recession-Proof Your Debt Snowball.

I have been tempted to slow down our debt repayment in favor of beefing up our emergency fund. Currently, it's $1,000. This makes me a little nervous because $1,000 won't go far during a major emergency such as an extended absence from work or, worse, a layoff.

Managing the Risk

On the other hand I have to consider the recession-resistance of our income. We're certainly not unaffected by economic conditions. But we're both in positions that would likely not be cut in the healthy companies that employ us. Additionally, daughter #1 has just received her final college tuition & expenses check from us this week. She graduates at the end of this quarter. This frees up a substantial amount of monthly cash flow in our budget.

So, for me it boils down to a risk management decision. We expect to have our debt smackdown! all wrapped up by mid-summer. At that point our only debt obligations will be first mortgages on our residence and a single-family rental property. The rental property mortgage is covered by rents received. And we could pay that mortgage from our incomes if it came to that. Bottom line? Are we willing to rely on a $1,000 emergency fund for the next four months or so? The answer is "Yes".

Car or Extra Hefty Emergency Fund?
Next on our goal list is to grow our emergency fund to three months' expenses. Easy enough. But after that, our plan is to focus on saving for a replacement car for wife. She's currently driving a 1999 Chrysler Sebring with over 100K miles. Normally, I would consider this car yet "young" with lots of usable life left. But the darn thing is already beginning to nickel & dime us with repairs. From the forum posts I've read, this is not a reliable vehicle when it gets some miles under the hood.

OK, enough justification. Back to the plan. With all the focus we've mustered to pay off debt we will amass $12,000 for the shiny red convertible purchase. But until it's spent, this fund will double as a back-up emergency fund. In essence, until the $12k is spent, we will have saved enough to sustain our expenses for nearly six months. Once the car is purchased we'll be down to our three month emergency fund, poised to immediately get it back up to six months' of expenses.

What Would You Do If You Were in My Shoes?
I am very interested in your take on my plan. Given our situation, do you think this strategy is sound? Is Spring Fever clouding my brain? Please weigh in with your opinion.


Scott @ The Passive Dad said...

I would continue to build up that emergency account until the Sebring died, or at least was near death. I don't know what the current value is for the 99 Sebring, but it's still probably cheaper than a car payment. Most of our cars, except an 01 Jeep made it past 100k. Our current family goal is to save 2 years worth of emergency expenses as the housing and employment situation is uncertain.

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