||Ask Dr. Don
Should I use my emergency
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.
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.
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, Insure.com
describes how you can hire
a policy finder, while another page tells how you can conduct
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
-- Posted: May 28, 2002