My cash reserves are around $11k, including an emergency fund of about a month and a half, and I budget rigorously. The only debt I have is $7k at zero interest, paid at $300/month, and it's from a family member who would almost certainly defer payments if something catastrophic happened. (BTW, our family has successfully made and paid tens of thousand of dollars of inter-member debt for many years, and the bankers and lenders vary over time.)

I happen to be in a free Dave Ramsey class, and a question came up. Should I pay off the zero interest debt before finishing my emergency fund? If so, why? My inclination is to finish accumulating my emergency fund first. The only substantive argument I can see to pay early is an emotional one: it's appealing and secure to have zero debt. Paying it off early will actually cost me money, because inflation is decreasing the value of the debt over time. My job is extremely stable, and also it's a rotating 12 month contract where I doubt they ever break the contract.

P.S. I should be honest and admit I'm currently throwing away some 401k match; my employer matches an incredible 9% 1-for-1 but I can only afford 8% while I'm getting on my feet. I've calculated that 8.5% is sufficient for my retirement.

  • 4
    8.5% originally struck me as a bit low to be sufficient for retirement, but then I remembered that you are getting that matched, so assuming you stay at the company long enough to be fully vested, your actual savings rate is 17%, which is flipping fantastic :). Just thought I would point out that for those who don't have such a great match, 8.5% is not always enough to save for retirement, depending on one's income of course.
    – Jeremy
    Commented Sep 30, 2012 at 3:11
  • Also, may I ask in what sector you work (and in what country - I assume USA)?
    – Jeremy
    Commented Sep 30, 2012 at 3:12
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    My sector is education, and it is indeed in the USA. My guess is the match is so high because some employees have grossly undersaved so the organization is trying to help them out. While we're being precise, it's actually a 403b, which is a similar animal to a 401k.
    – Paul
    Commented Oct 1, 2012 at 22:17
  • 2
    I decided to continue building my cushion and increase my retirement contribution to max out the match. Almost 18 months later and post-marriage I still believe that was the correct decision. I still like Dave Ramsey.
    – Paul
    Commented Feb 12, 2014 at 17:01
  • This is a morale vs economics question. Seeing you choose to ask this in money and not in interpersonal shows you already answered it for yourself.
    – Daniel
    Commented Mar 13, 2018 at 14:01

3 Answers 3


First I must say that I'm not a Ramsey fan. Sometimes loans will make your financial situation significantly better. Especially if its a 0% loan. Generally, I do think that leveraging has its place, its the ab-use of loans what causes problems, not the use.

Re your question - you're right in trying to first build up an emergency fund. You should have enough in it to be able to pay for yourself for at least half a year of unemployment or zero income. You only have one month.

Your family member gave you money for free, which is admirable, but I'm sure there's a limit to everyone's generosity and he might not give it to you for free again, once you pay it off. Thus, you should be able to handle your future troubles on your own, and emergency fund is a crucial part of this.

Pay as agreed, try not to be late, and you'll pay the loan off within 3 years. If you accumulate enough emergency fund, and you still have some extra left - pay some extra on the loan in order to pay it off early.

Do make sure you take full advantage of the employer's 401k match. This has, IMHO, much higher priority than paying off the 0% loan early.

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    +1 on everything. Except I would build the emergency fund slower in order to take advantage of the 401K matching, continuing to pay the loan as agreed. After the money is in 401K if you are ever in a true emergency you could withdraw or take a loan against it.
    – Geo
    Commented Sep 30, 2012 at 4:18
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    What geo said. I'd not skip a match to put cash aside at zero interest. Commented Sep 30, 2012 at 4:56
  • 3
    Note - littleadv did say to grab the full match, so it's not an exception, just extra agreement..... Commented Sep 30, 2012 at 21:51
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    It´s not exactly zero interest. It´s just that the interest is at the expense of others in the form of opportunity-costs. I don´t agree with the family/generosity part of the answer. I would presume paying back early would set you up for even more generosity as you show you don´t take advantage of it.
    – Daniel
    Commented Mar 13, 2018 at 14:05

I´d like to offer another perspective, neglected in the other Answers.

  1. The loaned money is not zero-interest. It will cost your family-member some opportunity-cost to lend it to you vs investing it elsewhere. You have to realize that this part, the interest of the loan, is a gift from this person.

  2. I don´t know the condition under which the loan came to be, but it can make sense to build a history of trust. Having good credit inside your family can be a worth of its own, and apparently also serves as a kind of emergency fund until you build your own. You will presumably be more likely to get another family loan if you need it, when you show you don´t take advantage of it.

I think the best course of action is to play with open cards and discuss the financial options with your respective family member. If they are old-fashioned and would keep the money in a savings-account anyways, it will not make much of a difference. If they are actively managing their assets, the might appreciate your early payback. I any event you will gain peace-of-mind and trust from your investor.


First, I must say I am a Ramsey fan.

Here's the thing, the borrower is slave to the lender, so if you eat Thanksgiving dinner with your generous relative next week, the food will taste different. Before I was a Dave fan, I borrowed money from my cousin once, and that debt was always hanging over my head. At times, it made hanging out awkward since I had money to 'go out' but not money to 'pay back.' It felt great once I paid him off, but the awkwardness was never cool.

I'm sure some will disagree (Dave wouldn't), but if you TEMPORARILY stop your 8% contribution, and combine that with your current margin, you could pay off the debt from your cash flow and complete your emergency fund. Since you said that $11k is 1.5 month's expenses, you would essentially need to double that for a three-month fund or quadruple it for a six month fund. I know $300 may not seem like a lot, but since I value family over money, I would pay that off today out of the $11k and then replenish and fill the emergency fund.

Also, your expenses will have dropped by $300/mo., so it will take less money to get to three or six month's expenses. Once that's complete, get your full 8% contribution.

FYI: I consider margin to be the difference between your income and your outgo.

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    then I'm even less fan of him. That is a ridiculous proposal that would definitely harm the OP.
    – littleadv
    Commented Nov 19, 2012 at 20:39
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    Why would it not be harmless? As long as you keep your obligations, shouldn't be any problem. Also, the "bad feeling" of indebtedness to your uncle is IMHO much better than the bad feeling of not having food to eat when you're old.
    – littleadv
    Commented Nov 28, 2012 at 19:13
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    While understandable, this is not rational. That's why I'm not a Ramsey fan - the claim that you should never have debt or should do anything to get rid of debt, even if it hurts you in the long term, is irrational.
    – littleadv
    Commented Nov 30, 2012 at 17:59
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    if the cost of debt is less than a benefit, then why not have debt? I don't mind carrying 0-APR balance on my credit card, or taking mortgage at the interest rate less than inflation, and see no reason to forgo such opportunities. In this case (of the OP), the debt doesn't cost anything, but your solution actually makes it significantly more expensive than it could have been. You're suggesting to pay enormous amounts of money for no benefit.
    – littleadv
    Commented Dec 3, 2012 at 18:08
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    This advice would effectively cost the OP 100%. i.e. Every dollar put anywhere else could have been an instant $2 in the 401(k). By all means, pay off debt, even the zero rate, if you wish, but consider the cost of leaving free money behind. A 21 year old who maximizes his 401(k) for the first 5 years will be ahead of those that start at 26 even if the 21 year old stops depositing. Long term growth is tough to recover. It's these horrific bits of advice from The David that made me lose any interest in anything he says. Commented Feb 25, 2016 at 22:48

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