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