Emergency Fund or Debt Repayment?

Have you ever wondered, should you focus on building your emergency fund or debt repayment?

emergency fund or debt repaymentWhen we get serious about our finances and want to make some changes, it can be hard to know what to do first.  One of the things people wonder is if they should put all their extra income to paying down debt first, or if they should build an emergency fund instead.

When looking at the numbers you may feel that it makes the most sense to pay down debt.  After all, you are paying interest on it, right?  You might feel an urgency to pay down the debt as quickly as possible to avoid having it hang over you any longer.

But actually, the truth of the matter is, it is wise to start building an emergency fund first.  Here’s why.

When we want to change our financial picture, the goal is to put an end to any consumer debt.  Not only should you want to pay down your debt as fast as humanly possible, you also want to avoid racking it up again.

When we change our mindset and our our spending habits,  running up balances on credit cards should be a thing of the past.  Really, the only reason you should be using your credit card is if you want to buy something to build up your credit or for a points program you have on the card.  Once you use it, you should pay off whatever you put on the card right away with cash from your bank account.  If you are struggling to pay whatever balance you put on the credit card right away, it may be wise to stop using credit cards for a time.

With online banking, paying your credit card balance has become so easy.  We may use our credit card for a purchase at the store or online and then  my next course of action is to log into my bank account and pay off the balance I just put on there.

There is nothing good about credit card debt.  So why in the world, when it comes to an emergency fund or debt repayment would I suggest you build up your emergency fund first?

Here is the thing – life happens.  Emergencies happen.  Expense out of nowhere happen.  It isn’t a question on IF it will happen, it is a matter of WHEN.  And when you are hit with a financial crisis, what happens if you have no cash to pay for it?  If it is something truly unavoidable, you have no choice but to put it on your credit card or line of credit.

Sometimes it puts you back at square one.

You NEED to prepare yourself for a crisis.

The goal is to change your financial habits so that you have cash sitting there for when your car breaks down, your furnace dies, or a medical expense arises.

There is much debate about how much you should save for an emergency fund.  Dave Ramsey, the financial expert, has stated that you should save $1000 before you aggressively pay down debt.  If you have an extremely low income and $1000 seems impossible, the goal should be at least $500.

If a crisis happens and you need to dip into your emergency fund, the idea is to top it up again before you go back to focusing on paying as much down as much debt as possible.

Once you are able to pay down your debt, you can go back to your emergency fund that should have 1000 dollars in it, and start building it up for more security.  Some people are able to do that, some aren’t.  Your income and expenses will dictate that.

You may not have a lot of expenses, but if you have a low income it can be hard to build up anything over $1000.  I wouldn’t be too hard on yourself if you can’t build up months of income worth of emergency fund money.  I would just aim at least for that $1000 and then get back to growing it as much as makes sense for you after you have paid down debt.

The reason a larger emergency fund can be helpful is because there are certain events in life that can happen that $1000 just won’t cover.  For example, job loss can put you back for months.

Whatever the state of your emergency fund, I can promise you that building up some savings will give you peace of  mind.

I’ve been on both sides of the coin.  I’ve had times we weren’t prepared for an emergency and had to use credit, and I’ve had times we have had our emergency fund sitting there, ready to bail us out of a tough situation.

I can PROMISE you that the feeling of knowing you can pay for the crisis is 100 times better than that sinking feeling in the pit of your stomach when you have to use credit.

We are fortunate enough to not have any credit card debt.  We lived for years with credit card debt that continued to accrue and it is somewhere we plan to never go back to.  It took a long time to pay off with our small income, and it just isn’t worth the heartache and sleepless nights.

Life is expensive enough without paying 19 % interest on credit card bills.

emergency fund or debt repayment

When it comes to the purpose of an emergency fund, let’s touch on what it should be for, and what it should NOT be for.

As I said before, you want that money there for a crisis or emergency.  If your vehicle dies, if your family member gets sick, or if your heat in your house suddenly breaks.  These are emergencies.

What should the fund not be used for?  General shopping, eating out, or home renovations to name a few.  If you just feel you HAVE to change the color paint in your dining room, or want a new summer dress, or plan to throw a party and need a bunch of supplies, these are NOT reasons to dip into the emergency fund.  Even if you want to dip into it with the objective of topping it up again quickly, it should not be touched for anything except an emergency.

We sometimes can be really good at making excuses for ourselves to allow for spending we can’t really afford.  We tell ourselves we’ve had a hard week and need a night out at a restaurant, or that retail therapy is needed to cheer us up when we are low, or that we just can’t complete a task at home without a certain product that we must buy.

We often use the word “deserve.”  We “deserve” whatever we are treating ourselves to.

Well, okay, I get that there are SOME necessities.  You probably NEED plates in your home to eat off, or if you live in the country you need a car because everything is out of walking distance.  But we need to be honest with ourselves on what is really a necessity and what is not.  This will prevent us from racking up the credit card debt in the first place.

For example, we moved to our home last year.  There was no dryer hook up.  There was no laundry line.  We went to the store to buy the items we needed to build our laundry line and were shocked at the price it would cost us for the pole and all the hardware.  I decided it was out of the question until we had more room in our budget.  We had a small indoor clothing rack we could use, and I tied a rope to a tree for outdoor use.  We used that for 10 months until we were able to fit a proper clothesline in our budget just this month.

These are the decisions that help build an emergency fund.  I’m telling you, guys, it feels so much better when you can pay for things outright rather than pull out your credit card.

So, when it comes to building an emergency fund or debt repayment, I encourage you to start building your emergency fund.  If you are struggling with any extra income for both an emergency fund AND debt repayment, check out my post on 80 Ways to Live a Frugal Life to help get you started in the right direction.  Or if you want to find a way to make money to add funds to your emergency savings, check out 17 Side Hustles to make Money.



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