Save for a rainy day or pay off debt?
June 30, 2009 by Jennifer Chait
Filed under debt/credit
Saving for a rainy day, or building an emergency fund and paying off debt are both smart financial moves, but obviously it’s tough to do it all at once so what should you do first? Should you pay off the debt or sock away cash in an emergency fund?
- Aim for creating a small emergency account and put a larger bulk of your cash into paying off your debt. Why?
- Paying off debt builds confidence which better prepares you to handle your finances. It feels good to save as well, but it feels much less stressful to have less debt.
- Paying off debt is building a better savings. While an emergency fund will grow if invested or even if placed in a decent saving account, it won’t grow at the same high rates that debt does. The sooner you pay off debt and cut out those hefty interest charges, the sooner you can save up a much better emergency fund.
- Money expert Dave Ramsey notes that paying off debt in full builds a momentum that “snowballs” into more and more results. Basically, once you get the satisfaction of having a debt paid off you’ll like the feeling and it’s easier to push onward, paying off more and more. People do like instant gratification and are more likely to follow through when they get it.
Since you do need some money for a rainy day, save up about $1000 vs. the many thousands you should have in an emergency fund. That $1000 will tide you over until you finish paying off your debt, then you can add more cash to your savings account.
What do you think – rainy day or debt first? AND why…
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We are facing this decision right now too-it is so hard to decide what is best…We could pay off about half of out debt with the emergency fund we have but then what happens if my husband is laid off from his job-we are a one income family. Suzy Orman recommends paying minimums on credit cards at this time until you have a fully funded emergency fund. We like both Dave Ramsey and Suze Orman and we are taking a mixed approach. We will keep at adding to the emergency fund while making the minimum payments on debt until we reach $10,000-$12,000 in the emergency fund then we will start putting all of the money we were putting into savings on debt. In this current economy we just think it is too risky to be jobless with only $1,000 in an emergency fund. That is out approach looking forward to hearing other’s plans!
We are going through this decision now. Last year, my husband was laid off for 5 months. I kept saving every bit that I could because I didn’t know when we would need the money. In the meantime, we accumulated about $2,000 in debt. I know that’s not a huge amount, but I’ve been debt free for a little while and would like to keep it that way. Then our house was on the market after we moved and we were making two house payments. Again, I was saving all the money that I could and not paying off the $2,000 in debt. Our house just sold and so now I’m working on paying off the debt. I’m sending in over $1,000 today and hope to have the rest paid off soon.
I’m all for paying off debt and building an emergency fund, but for our situation, I had to hang on to the money.