The debt looms over you. It keeps you up at night. It threatens your future. And you want nothing more than to get rid of it as soon as possible.
That is a great goal. But if your savings is suffering because of that goal, you could find yourself in even more debt.
From a mathematical standpoint, I know that it doesn’t make much sense to build an emergency fund before you pay down the debt.
Your emergency fund, when placed in a safe and accessible savings account will earn almost no interest. On the other hand, your credit card debt could be racking up 20% interest (or more) each month it sits there. The longer the credit card debt sits there, the more money you will owe. Your savings will not stay ahead of that.
There’s also a psychological cost to keeping that debt hanging around. Debt just feels crummy. No one likes to owe anyone anything.
That said, I still think you need an emergency fund before you aggressively work on paying down debt.
Why You Need An Emergency Fund Before You Pay Down Debt
Paying down debt requires a significant shift in thinking. You must learn to despise debt and to resist any and all attempts to lure you into it. You must change your attitude toward debt.
Before paying a single penny on your debt, you must vow to not get into any more debt. Throw your credit cards in the freezer to keep from using them. Do not ask anyone for a loan. You will need to figure out how to get what you need with exactly what you have. You can’t get out of your debt hole if you’re still throwing more debt in it.
The only way you are going to be able to keep this vow to not accumulate any more debt is to establish an emergency fund. You need at least $1,000 (but preferably three months of living expenses) in this emergency fund. When your car breaks down or the water heater quits, you won’t have to turn to your credit cards or scramble for a personal loan. You won’t have to worry about payment plans and interest rates. You’ll be able to draw on the money you saved in your emergency fund.
Your emergency fund becomes your insurance policy against more debt. It helps you make the fundamental attitude shift you need to make if you are going to get out of debt and stay out.
You can save money even when you think you can’t. And if you want to get out of debt, you must.
Fund the emergency fund, but stay current on your bills
Don’t ignore your debt completely while you build your emergency fund. You need to keep up with at least the minimum payments while you work on your building your emergency fund. And it feels good to know you’re making progress, even if it is at a snail’s pace.
Remember that personal finance doesn’t have to be all or nothing. You can pay the minimum (or even a little above if your budget allows) on your debt and tuck away money in your emergency fund at the same time.
Make the shift away from debt and financial insecurity. Work on that emergency fund. Then work on the debt.