Pay Off Debt vs. Save an Emergency Fund

by Ryan Yates

Better to Save or Pay Off Debt

Which is best? Saving an emergency fund or paying off your debts?

The eternal debate of which comes first: pay off debt or build an emergency fund?

Many financial experts have given countless reasons supporting both views. Some say building an emergency fund must be number one on your list of financial goals.

While others will have you believing you’re a fool for not paying off your debt before you attempt any other financial hurdles.

Although this topic may never be put to rest for all time, let’s take a look at the practical side of the discussion and see why building an emergency fund before you pay off debt will give you a more stable financial foundation.

Emergency Funds Help Eliminate New Debt Before it Starts

Stay with me on this, we’ve got to cut our way through some thick jungle. The point of having an emergency fund is so you won’t have to use credit of any kind to pay for unexpected events.

One of the worst financial mistakes anyone can make is to use credit as an emergency fund. If you practice this nonsense, you’re setting yourself up for financial disaster.

Building an emergency fund, which Dave Ramsey and Suze Orman both believe should be numero uno, supplies you with cash to use against any unforeseen financial emergencies. And since you’re using cash money for these expenses, you’re not going deeper into debt and you don’t owe anyone interest.

When you have an emergency fund available to tackle expenses, you’re guarding yourself against using credit and you’re putting an end to your debt cycle.

Paying Off Debt Doesn’t Simultaneously Benefit Your Emergency Fund

Don’t get me wrong, eliminating your debt is great!! But we’re trying to focus on which should come first, debt reduction or saving up an emergency fund.

When you’re putting money into your emergency fund each month, you’re guarding against using more debt to pay for emergencies. But when you’re paying off your debt first, you have no failsafe against unexpected costs.

Let’s say in four months you’ve scrapped together every bit of extra money you could find and paid off $2,300 of debt. You don’t have any cash in an emergency fund, but you’ve put a big dent in your debt.

Then a thunderstorm knocks a tree into your roof and it’s going to take $2100 to make the repairs. Since you don’t have available cash, you do the only thing you can; use your credit card. And bam! …the money gets added back into your balance, you’re being charged interest, and the cycle continues.

If you would have built up an emergency fund with your $2300 in one of the best instant access savings account, you could have paid cash for the repair, saved the interest charges, and avoided the psychological torture of being back where you started with your debt.

Although reducing your debt should be everyone’s focus, the smarter decision would be to first create an emergency fund safety net. I’d say my conclusion is that building an emergency fund comes first, and paying off debt is a very close second.

So did I hit the nail on the head or did I totally whiff? Let me know what you think. What’s your best answer to the debt reduction vs. emergency fund debate?

Photo by Mykl Roventine


Melissa July 18, 2011 at

This is totally a cop-out answer, but my strategy was to do both at the same time. I agree that it’s kind of dumb to spend six months saving up a decent emergency fund in an account that you maybe get 1% interest on while your student loan sits unpaid at a much higher rate. But then if you focus only on your loan, and something happens, you’re screwed. I think it’s especially important to make sure you have at least a little safety net if the debt you’re dealing with is student loans, which have a relatively low interest rate, because if you focus on paying those off and then are hit with an emergency $2000 expense? Well, you can’t pay off that expense with your student loans. Hello, credit cards. And that’s a way bigger deal.

The Nickeletta Project July 18, 2011 at

We saved up an emergency fund first, and then began tackling extra funds towards debts. Having the emergency fund offers a peace of security that I won’t have to add to my debt in the event a car breaks down, or some unplanned for home repairs come up.

Money Beagle July 18, 2011 at

My advice is that if you’re really that uncertain about it, go 50-50 each way. You’ll get off on the right foot in both regards, and my guess is that eventually you’ll see a clearer path once you get a taste of both sides.

Ginger July 18, 2011 at

If you paid off $2300 then had to add $2100 to your debt, you would pay less interest then saving up $2300 and using it to pay the $2100 repair. Dave Ramsey is great for the psychologically effects and controls you need to pay off debt but if you can go by the numbers you will be better off.

Ryan Yates July 19, 2011 at

I don’t think doing both at the same time is a cop-out, but I might do 70/30 (70 going toward the EF). I struggle with this in practice from time to time. It’s hard to save up even $2000 if you’ve got a balance on a card drawing 17% interest. It feels right to pay off the high interest debt first. But we can’t plan for emergencies, we don’t know when they’re coming. That’s why they’re emergencies. No matter how much you throw toward an EF, I think we can all agree to pay more than the credit card minimum payment.

Amy July 20, 2011 at

We are trying to save up 3 months of necessary expenses (mortgage, insurance, utilities) and once that is saved, we will then put everything else towards our debt. This will give me great peace of mind knowing that I have money saved in case something happens.

Cara Matthews December 14, 2011 at

I love your blog first of all. Today’s post was about IRA’s and i was so excited to read it b/c I just opened one about 6 months ago. But some of your highlighted words led me to this post. VERY good advice. i love Dave Ramsey. He is so wise and I like the idea of an emergency fund.

Let me ask you this… if you have $4500 in savings and no debt other than your vehicle, would it be smart to use some of those savings to help pay down my car faster?? or do i keep the money there??

Ryan Yates December 14, 2011 at

Thanks for the encouragement Cara. I’m a Dave Ramsey fan as well. To your question about paying off your car debt or keep the money in savings, I guess I would want to know how much will it take to pay off the car?

If $4500 will pay off the car, I would go ahead and pay it off (taking the $$ out of savings). My reasoning would be that you’re essentially paying yourself by way of discontinuing interest payments with the car, and you could quickly build up an emergency fund with the money that used to go for the car payment.

Even if the $4500 won’t completely pay off the car, I think, for me, I’d still put $3500 of it toward the car (keeping a $1000 emergency fund available for emergencies, lol).

Whenever the car is paid off, I would keep making the same payments, but pay yourself by putting that amount in a savings account each month.

Jimmy @ CC Bank December 3, 2017 at

I would hope most people know they should accrue an emergency fund before paying off debts – it’s not exactly wise to go years and years one accident away from homelessness.

That being said, if your income really is so low that you have to pick between paying debts and building an emergency fund, you had better already be pinching every last penny. If you’re neglecting your debts while also spending $100’s every month on eating out and Starbucks, I would suggest you strongly reconsider your spending habits.

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