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I have an emergency fund and some money saved to buy a car which is my need. The newer versions of the car can be bought if I pull a major portion of the money from my emergency fund. My job would give me enough cash to enter back enough money for the emergency fund after a month. Would it be a wise decision to use that money?

I don't currently have a car. I use Uber for office but it's not very convenient as late nights it's not safe to drive with a stranger.

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    Do you really need "the newer versions"? Buying a car with another year or two on it can be significantly cheaper. – keshlam Dec 25 '16 at 14:03
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    @Fahad Uddin: A 7-8 year old car almost certainly will be perfectly drivable. Hondas and Toyotas are barely broken in at that age. (My two are 16 and 28 years old.) I suspect your car expert expects to make money from you buying a newer (and thus more expensive) car than you need. If you buy a cheap older car and it breaks down, in the worst case you junk it and buy another, and you're still better off financially than if you'd bought the more expensive newer one. – jamesqf Dec 25 '16 at 18:45
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    @FahadUddin Is the "car expert / car seller" selling to you (or connected with the sale in some way?) Beware of conflict of interest! – mattdm Dec 26 '16 at 17:03
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    @mattdm: Yes. I went to him to buy a car and he gave me this suggestion. Seems like he wanted to make some money out of the free advice. – fuddin Dec 26 '16 at 19:10
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    @jamesqf: Be aware that a 7-8 year old car in Western Europe is generally incomparable to a 7-8 year old car in less affluent parts of the world. The initial sticker price will be higher, which does reflect a better build quality. Better materials will have been used throughout. On the other hand, maintenance can go either way. In Western Europe, mechanics are expensive but generally do have better tooling available. – MSalters Dec 28 '16 at 0:23
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The purpose of the emergency fund is to enable you to pay for unplanned necessary expenses without going into debt.

You know that cars don't last forever and eventually need to be replaced. Ideally, you would have a "car replacement fund" which you contribute to a little every month. (Essentially, it is a car payment to yourself.) Then when it comes time to get a replacement car, you have money set aside for this purpose and know exactly how much you can spend.

However, in your case it seems that you don't have enough money in your car replacement fund for the car that you want. There are a few different causes that might have led to this situation:

  1. Due to unforeseen circumstances, you need a replacement car before you thought you would need it.

  2. You find that your planning was not quite right, and you weren't saving as much as you need.

  3. You are trying to buy a more expensive car than you need.

If a replacement car is a necessity, two of these are emergencies, one is not.

If you don't have enough cash set aside for a car, it is certainly better to spend your emergency fund and pay cash than to borrow money to buy the car. Only you can decide if the car you are looking at is appropriate for you, or if you should be looking at a less expensive car. After you purchase the car, build your emergency fund back up first, then start saving for your next car.

  • @Ben: I am 26. The all money I have is the one needed to buy the car (including the money I put aside for emergency fund). I don't have any assets. I started working from 24 years of age and saved this much. I do not have a car and never had one before. – fuddin Dec 25 '16 at 16:08
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    @FahadUddin If you can replace the money you would take from your emergency fund in one month, then it sounds like this would not have a big financial impact for you. I don't think you need to feel bad at all about temporarily dipping into that fund. Like I said, it is much better than taking out a loan. – Ben Miller - Reinstate Monica Dec 25 '16 at 17:11
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The first thing that strikes me is: Is this a time-limited offer? Because if you can expect the offer to still be valid in a few weeks, why not just wait that month (which will earn you the money) and buy the car then?

The second thing you need to consider is obviously the risk that in the interim, there will be an actual emergency which would require the money that you no longer have.

The third thing to consider is whether you need the car now. Do you require a car to get around and your current one is breaking down, perhaps even to the point that repairing it would cost you more than buying a new car and it is currently not safe to drive? If so, compare the cost of repairing to the cost of buying; if the difference is small, and the new car would be more likely to be reliable than the old car after spending the money, then it can make sense to buy a new car and perhaps sell the old one in its current condition to someone who likes to tinker. (Even if you only recover a few hundreds of dollars, that's still money that perhaps you wouldn't otherwise have.)

The fourth thing I would consider, especially given the time frame involved, is: Can you get a loan to buy the new car? Even if the interest rate is high, one month's worth of interest expense won't set you back very far, and it will keep the money in your emergency fund for if there is an actual emergency in the weeks ahead. Doing so might be a better choice than to take the money out of the emergency fund, if you have the opportunity; save the emergency fund for when that opportunity does not exist.

And of course, without knowing how much you earn, take care to not end up with a car that is no more reliable than what you have now. Without knowing how much you earn and what the car you have in mind would cost, it's hard to say anything for certain, but if the car you have in mind costs less than a month's worth of net pay for you, consider whether it's likely to be reliable. Maybe you are making an absolutely stellar pay and the car will be perfectly fine; but there's that risk. Running the car by a mechanic to have it briefly checked out before buying it may be a wise move, just to make sure that you don't end up with a large car repair expense in a few months when the transmission gives up, for example.

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    The point about keeping cash for real emergencies by taking on short term debt is excellent advice... as long as they actually have the willpower to pay it off in a month. Idk what you guys call it, but I would avoid the "poor trap" of overdraft fees, un-ideal debt (fees, high rates, etc.), late fees, etc. that come with having $0 cash on hand. It would definitely be worth it to pay some loan fees and interest for a month if they actually need to spend more money than they have. – Zach Mierzejewski Dec 25 '16 at 14:50
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    @ZachMierzejewski Even if you have the money on hand, taking a loan (assuming that you actually pay it off quickly) can be a good idea because it can smooth out your cash flow. In that case, you are trading some interest expense for having cash on hand if required. That is not really all that different from trading potential investment gain on the money (by investing it e.g. in the stock market) for having the money readily available and being relatively certain that you won't lose principal (by keeping it for example in a savings account). There are valid arguments to be made for both. – a CVn Dec 25 '16 at 15:47
  • There is a problem with taking a loan. I am a Muslim and I don't deal with interest. I am guessing that makes the emergency fund much more important to me or maybe I should set aside different funds for different goals. – fuddin Dec 25 '16 at 16:13
  • On being time limited: Its not a time limited offer but I don't have a car. I use Uber for office but its not very convenient as late nights it not safe to drive with a stranger. – fuddin Dec 25 '16 at 16:20
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The mix how how you present this feels contradictory. You would pull a 'major' portion from the emergency fund (EF), but at the same time, you'll replace it in a month.

The first bit scares me, this is not the purpose of that fund, and the issue is the aspect of money that's psychological. Money is a habit, if you justify this use of the EF now, it gets progressively easier for this purchase or that, and the fund loses its intended purpose.

If the second half is accurate, that your income would replace that money in a month, i'd say the fund wasn't fully funded to its proper level, 6-9 months of all expenses to get you though issues as bad as a job loss.

The great thing I see in your question is what's missing. You're not looking to buy a car with a loan. That puts you in a good situation, and should push those answering to cut you some slack on the one month "bridge loan" from your own savings.

Edit - OP add 2 key points, His EF is 3 years expenses (wow, kudos to him!), but he's living like a student (i.e. with parents, which keeps his costs low). If this latter observation seems judgmental, I'll re-edit. The finances of everyone would be far better off if we adopted multigenerational living. The young could save as Fahad is doing, and when parents retire, they can know they are cared for. In the US, I'd say "when you move out, your expenses will go up drastically," but in this case, that may not happen, or not soon. This is my observation the world is a big place and our answers need to fit the OP's situation, not assume our own standards apply to all.

Buy the better car. You saved. You earned it.

  • About the size of the emergency fund, that really depends on OP's expenses (and liabilities) compared to OP's monthly income. If the liabilities are small (no dependents, renting an apartment, etc.) and income is really high (note that OP, according to profile, works as a software developer, which traditionally is a high-income field), it's reasonably plausible to have expenses that are a relatively small fraction of one's income thus allowing for a high savings rate. I'm sure we could analyze this in great detail, but there just isn't enough information in the question to do so. – a CVn Dec 25 '16 at 16:01
  • Hi Joe. My emergency fund is 3 years of expenses. I live very frugally so the amount set is less (like living with parents, using public transport and not spending much). – fuddin Dec 25 '16 at 16:15
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    The main purpose of an emergency fund should be to cover your expenses until you can do whatever you need to do to end the emergency. As such, "3 years of normal expenses living your current lifestyle" is the wrong way to measure it. If something unexpected happens which forces you to change your lifestyle for the rest of your life, that doesn't mean the emergency lasts for the rest of your life - it's only an "emergency" only until you have got your new lifestyle under control. – alephzero Dec 25 '16 at 18:30
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    My bad. There is mistake in my above comment. Its not 3 years of expense but 3 months of expense. – fuddin Dec 26 '16 at 13:58
  • No worries. I need to edit my answer back to "wait, don't do it". Later today. – JTP - Apologise to Monica Dec 26 '16 at 15:59

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