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?
Zann says
I feel having an emergency fund is top priority for a couple of reasons. In most cases, if you'd had an emergency fund in the first place, you wouldn't have had to pull out your credit card to cover the inevitable unexpected expense (and for me, it usually involves a car) and having the debt you're now struggling beneath. All those emergencies add up, and using your credit card as a remedy is always going to cost you more unless you're one of the few citizens on earth who is able to pay off the debt you just incurred before any interest is charged against it. In my dreams. So, you've remedied the emergency, but now you're more in debt, and what would have cost you $500 in cash is now going to cost you much more as this new debt is piled upon your old outstanding balance & high interest rate. That usually makes me feel like a loser, and that causes stress, and both are bad feelings. Second, I find I make better, more well-thought-out decisions when I use cash. I experience the purchase differently, more conscientiously, and am more likely to shop around more for a better price and/or higher quality for my dollar. It's a calmer purchase. Lastly, and maybe most importantly, is the issue of self-esteem and self-respect. If I know I have money put away for emergencies, I feel more responsible (or more adult, if you will) and less like a debtor. I also feel less vulnerable against the next unforeseen expense and worry less about it. And not to sound like a cheesy commercial, but that sense of security -- not feeling blown away by the haphazardness of life on a shoestring -- is priceless. Watching your overall debt decrease incrementally, slowly, can be satisfying, but, let's face it, it's a very measured bliss. But with an emergency fund in place, at least you won't see your debt reduction progress crushed the next time the unexpected financial surprise comes up -- and it always does.
Corrie C says
Definitely! Our emergency fund is peace of mind for me. I know that when an inevitable emergency happens I'm prepared. I may not like spending the money, but at least I have it and I don't have to worry about where it's going to come from. Thanks for sharing!
Marianne says
Absolutely NOT a financial expert here, but: I would probably go with the debt first, along the lines of: having a decent line of credit available will be of use in an emergency, and depending on the emergency type, having no cash on hand might actually be helpful in getting help from others
Brittany says
Yes to this post! I had the same dilemma a few years ago out of college: should I start an emergency savings or pay off my student loans? My mom told me that while I might have all my loans paid off or nearly paid off, if an emergency arises I will be right back in debt. I am glad to say I took her advice to start an emergency savings because I ended up needing to use it at least twice since then for car troubles. I would have been in a bind without that money. I have since then added back to my savings and then some now that I realize the importance of savings. I also added an extra $30 a month on each loan payment and I can see that it is really making a difference! My loans would have taken 10 years to pay off, but I was able to almost cut them in half and I should have one paid off in a year from now and then I can focus on the others. This is solid advice for anyone in this predicament.