The first step to getting help with your finances is admitting you have a problem. The next step is creating a working budget to help you get out of your financial mess. But, once you have a budget, many people are frozen with indecision - not knowing which next step to take. What should they do first with any extra money in the budget - save for their emergency fund or pay down debt?
There are varying opinions on this issues, but in my opinion you need to start with at least a small emergency fund. Dave Ramsey suggests quickly building up a $1,000 emergency fund before you do anything else.
Why Start with A Small Emergency Fund?
It's just a fact of life that emergencies are going to happen. Your car is going to break down or a strong wind is going to blow shingles off the roof of your house, for example. Something is eventually going to come up in life that's going to require a chunk of money. If you immediately start with debt repayment without building a small emergency fund, you're likely going to go even further into debt to pay for the emergency.
Focus on Debt Repayment After You Have a Small Emergency Fund
Once you have that small emergency fund set up, then you can really focus on paying back your debt and getting rid of it once and for all. You'll have the peace of mind knowing that you'll still be able to take care of life even if an emergency pops up.
And even further down the road, once you've repaid all your debt, you can focus on building up 3 to 6 months of expenses into your emergency fund that you can use in case of a job loss or health issue.
What about you? Do you think you should start with an emergency fund or debt repayment first?