Which should take priority: Pay off debt or emergency fund first? It can be hard to know what to do when two big things are vying for your money, so it’s a common question.
The answer is pretty simple: everyone absolutely needs an emergency fund, so build a baby emergency fund before focusing on debt reduction. (Unless you’ve got pay day loans hanging over your head, in which case make getting those taken care of your priority after food, shelter, & basic transportation.)
Of course, you’ll want to be sure to continue making the required minimum payments on your debt while working on your fund.
Let’s talk about why the order makes a difference next.
Pay off debt or emergency fund first: Why the order matters
When you’ve got debt hanging over your head, it’s completely natural to want to see that gone as quickly as possible. No one likes paying all that interest!
So at first glance, it may seem like it makes sense math-wise to focus on paying off debt first. After all, you’ll be saving money on interest by doing so.
But here’s the thing: Unexpected things happen all the time while you’re working on getting out of debt. Things like needing to pay a dental or vet bill, needing new brakes, etc. I’m sure you can think of some recent unexpected expenses.
If you don’t build at least a baby emergency fund first, when life happens you won’t be able to pay for it. Instead, you’ll turn to debt, feel even worse about yourself, and end up owing even more money — paying more interest over the long haul.
On other other hand, if you’ve gotten an emergency fund going first, when life happens you can use that money instead of going deeper into debt. You may still feel discouraged that you used that money you diligently saved up, but try to remember that it’s actually PROGRESS that you had the money available in the first place.
You’re using money you already have instead of ending up deeper in the hole. So definitely focus on that baby emergency fund first. Then work on paying off debt.
(If you want help with both those things, don’t miss my Destination Debt Freedom course.)
But there are some other details to consider, like “how much should my emergency fund be?” and other common questions. Let’s start by talking briefly about the different levels of both emergency funds and debts.