Save or pay off debt? Depends on your emergency fund

If you’re in debt, especially consumer debt, it’s certainly very important to get out of debt.  The borrower is slave to the lender, after all.

As good as getting out of debt is, though, faster isn’t always better.  If you’re paying down your debt so fast that you have absolutely no cushion in your savings account, you’re left exposed to the smallest financial emergency.  Off to the credit cards again to rack up some more debt to solve the emergency.

This is why it’s good to take a break from paying down debt to build up a small emergency fund.  Even a small emergency fund like $1,000 will provide enough buffer to weather through a car repair, a root canal, or some stitches from a playground accident.

If you’re paying down your debt already, that’s great.  If your emergency fund is lacking, then consider making the minimum payments on your debt for a while (even though this won’t pay down your debt as quickly) and use the difference to put into a savings account.

Dave Ramsey recommends saving $1,000 for an emergency fund before tackling debt head-on with accelerated payments.  Suze Orman recently recommended getting a savings account funded as a buffer in case of job loss or other emergency before paying down debt as well.

On the other hand, if your emergency fund is in good shape, then get rid of the debt!  It’s likely costing more interest than you’re getting with your savings.  (What savings account pays 14.99% interest? 😉 )

Bottom line:  Pay down your debt, but don’t leave yourself exposed to the smallest of financial ill winds.

1 thought on “Save or pay off debt? Depends on your emergency fund”

  1. If you’re liable for the debt, the right thing to do is repay it. You’ve already consumed the goods or services financed by the debt, it’s your responsibility to pay for it. Can your employer get away with withholding a month’s salary? The same should be true for debt.

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