Typically, what is considered realistic? 6 months expenses? A year? I understand this is more of an "opinion" question but I am still curious what people think is a responsible buffer (in the event of losing a job, getting hit with an illness/injury insurance can't fully cover, etc).

I want to start attacking my loans more aggressively but worry that I am spending money today that I would get more utility from saving in terms of countering risk. I live in NYC, if that matters.

My student loan details:

Lender 1:
$6110, 3%, $37 minimum
$5160, 2.5%, $30 minimum

Lender 2 (federal fixed-rate):
$4540, 5.7%, $61 minimum
$1780, 6.5%, $25 minimum
$4540, 6.55%, $67 minimum
$3470, 6.55%, $51 minimum
$2050, 2.15%, $25 minimum

Lender 3:
$9110, 2.83%, $90 minimum
$1975, 6.00%, $30 minimum

So about $38-39k left, monthly payment here $416. I was off earlier, sorry!

I also can't consolidate them (if that matters, tried before).

  • Do you have 9 separate loans? – C. Ross Sep 5 '12 at 20:38
  • @C.Ross I believe so -- they're all separate entities with separate rates, etc. Loans are through ACS, AES, and Citi – IAmBatman Sep 6 '12 at 13:01

Most financial guru's recommend between three and six months of savings, modified by how likely you think it is you'll lose your job. Note that the months here are months of expenses not income.

Dave Ramsey on the other hands recommends saving only $1000 until you've paid all debts (except your home). This strategy only makes sense if you're paying off debt very aggressively.

Since you have many relatively small debts, you would benefit greatly from the debt snowball (recent research shows it's more effective in practice than paying off high interest first). As you quickly pay off the smaller loans you reduce the amount you must pay each month, reducing your risk (your emergency fund now goes that much farther), and enabling you to put more on the next debt. In your particular case the debt snowball would be:

  1. $1780, 6.5%, $25 minimum
  2. $1975, 6.00%, $30 minimum
  3. $2050, 2.15%, $25 minimum


Again, this is good because it quickly reduces your monthly required debt payments.

  • 3
    +1 - I would add that for somebody aiming at their debt, six months of ABSOLUTELY REQUIRED EXPENSES is a good modifier. I wouldn't add cable TV, but I would add internet as required if I were out of a job. – MrChrister Sep 5 '12 at 18:32
  • 1
    The $480 - is it for multiple loans? How do they break out? What's the total? In general, this isn't like paying off a credit card, with a card, you kill high interest debt, but if you run short, you can borrow a bit back as you adjust your spending. Prepayments to these loans or mortgages are gone. It's only when one is paid in full that you see the benefit of the improved cash flow. If the school loan is a number of smaller ones, I 'd suggest starting with the highest rate one and kill it before prepaying others. – JTP - Apologise to Monica Sep 5 '12 at 19:19
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    @C.Ross I do not have a family support/safety net (I am an Ivy League graduate whose parents were killed -- hence my screenname XD Sorry if that's too much info), and so if something happened to me, I'd be on the hook for myself. I do have a girlfriend and her family is supportive but I'd rather not rely on that as a failsafe. There's no immediate risk of being unemployed for a full year -- I just greatly, greatly fear the possibility and don't want to ever risk not having enough money. 6 months seems to be cutting it close since employment can take a while. Reasonable or paranoid? – IAmBatman Sep 5 '12 at 19:21
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    @IAmBatman I'd say paranoid. Also think about the risk that your student loans are to you, and how much risk it would remove by paying them off. How long are you going to let that sword hang over your head? Also, cape and cowl? – C. Ross Sep 5 '12 at 19:25
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    @IAmBatman - paranoid, in my opinion. You are well set and capable. The fact that you are fretting about it at all is the clearest indication that you won't run into trouble. – MrChrister Sep 5 '12 at 19:26

You need to protect from two types of disasters.

  • The refrigerator breaks or the car needs a repair. This should be about $1000. When you use it you need to replenish it. To do that you drop the student loan payments back down to the minimums.
  • Job loss. This will mean that you need to cover your expenses for months. Some people used to recommend 3 to six months. Now they are upping that to 6 to 12 months of expenses. It will take several years to get to those levels, especially with the student loan payment.

You need to set a goal. In 5 years I will have X months of emergency funds. Then start building it. You can also make sure that any found money (birthday check from your grandmother or bonus check at work) goes into building the fund.

While is seems a waste to pay all that interest for the student loans, you may decide that having an emergency fund is more important.

Note: don't mix the two types of emergency funds. It is less confusing to have two sub accounts, because it avoids the double counting of the funds.

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