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Should I use my emergency fund?

Dear Dr. Don,
I am a 40-year-old single woman who makes a decent salary. I am plagued by a $5,000 debt.

When my father died, there was no insurance to pay for his burial. I took the financial responsibility to pay for the funeral. I have been paying approximately $700 a month.

My company has been purchased and there are rumors of possible layoffs. I feel my position is relatively safe. My question is, should I use the $3,000 I have in my money market fund to pay down this debt?

This money was set aside for my emergency fund. I have no other debt and no other savings. I really want to pay off this debt at a 7-percent interest rate.
Please advise
Candace Cash

Dear Candace,
Don't use your emergency fund to pay down this debt. Paying off this debt isn't an emergency. If you can't handle the monthly payment, ask the creditor to modify the loan terms or find a lender to refinance the loan.

Paying an annual rate of 7 percent on the debt is reasonable, and you're not likely to get a lower rate if you took out a personal loan to change the loan terms.

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Are you sure your father had no insurance coverage? Some company pension plans offer burial insurance for employees. If he was getting a pension, you should contact the plan administrator and ask about burial insurance. He also may have had a life insurance policy that you aren't aware of.

Some life insurance companies will let you search for unclaimed funds on their Web sites. For example, New York Life has an easy-to-use search function. Or, describes how you can hire a policy finder, while another page tells how you can conduct a do-it-yourself search for a policy.

Meanwhile, keep plugging away at this debt. According to my financial calculator, a $5,000 debt at 7 percent with a $700 monthly payment should be paid off in eight months, with the eighth payment only $222.45. You'd pay about $125 in total interest expense.

You can use Bankrate's loan calculator to check my work. Use 12 months, a $5,000 loan, and 7 percent interest to arrive at a monthly payment of $432.63. Then input $267.37 as an additional monthly payment amount to bring your monthly payments up to $700.

Tap your savings to help you make a monthly payment if you need to, but don't cash out your savings to pay down this balance.

-- Posted: May 28, 2002

Read more Dr. Don columns
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See Also
Building an emergency fund
Where to stash your emergency cash
Consider tax-exempt bonds for emergency fund
More Dr. Don stories

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