Financial Information
Save up for an emergency fund or pay off debt?
Question : Save up for an emergency fund or pay off debt?
I recently got married and two of the things on my financial to-do list (among other things) are to a)save up an emergency fund of 3 months (for now) worth of expenses and b)pay off $ 25K worth of debt from car payments, credit cards, and student loans.
I have already saved up a little more than a month’s worth towards the emergency fund and am wondering if I should put that on hold and attack the debt now?
What would you prioritize and why?
PS: We both have nice, steady jobs.
pay off debt
Best answer:
Answer by Linda R
All the financial advice I’ve ever heard says make your emergency fund your first priority. Even though your jobs are steady, the theory is other things could happen, like illness or injury that would keep you out of work for a while, so in that event, it’s more important to have a cash fund. The adage is, “plan for the worst”. After you have your emergency fund built up, then you should start paying off your highest-interest debt first, then the next highest, etc. I recently went through a period where I was out of work, and all I can say is Thank God for that emergency fund. It also gives you a lot of peace of mind knowing that you’re covered if something happens.
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#2 written by Joe 1 year ago
There is no exact rule on this. Most financial advisors recommend 3-6 months for an emergency fund before paying off debt. However, if you have really high interest on the credit cards, you might consider saving up 1-2 months of emergency funds then hitting the credit cards. Car payments are usually lower interest, and I would probably save up a full 3 months before attacking the car payments. Student loans are usually even lower interest and less of a concern. Always try to pay off the highest interest loan first, then attack the next highest.
Giving more advice is difficult, because you haven’t told me what the interest rates are on your debt. You also haven’t said whether you could survive on one person’s salary. If so, you can get by with a lower emergency fund.
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#3 written by Doctor Deth 1 year ago
alternate – concentrate on paying off the credit cards first among the debt items – car and student loans are probably a lot lower int rate – once you get a credit paid off, use half the money you are saving each month not making the payment to increase the emerg fund and apply the other half to one of the other debt items to accelerate paying it off – repeat with each account/credit card you pay off – student loan should be next after credit cards are paid off, since it’s probably the largest balance
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Both. You never know when you will need that emergency money… better to be putting something away than nothing, then compounding your debt when something happens.
Pay each creditor the minimum payment. If you feel you can make more than the minimum payment, take the amount of your extra cash, divide it by 2 – choose the smallest debt for half the extra money and the other half for your savings. When the smallest debt is gone, allocate those additional funds to the next smallest one.
Sounds like you’re trying to be responsible with your money. Best of luck to you!