Pay off Debts or Build an Emergency Fund First?
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Two common goals for couples are paying off their debts and having a financial cushion.
Sometimes, though, it can be frustrating because you don't know which do first.
You may want to have some savings stashed away for emergencies while your spouse wants to tackle your debts.
How do you find a system that works for you two?
Dave Ramsey's Baby Steps
Dave Ramsey suggests having a baby emergency fund of $500-$1,000, depending on your circumstances.
I believe that's a pretty good rule of thumb.
emergencies pop and while it may not cover everything, having $1000 stashed away can be enough to handle most situations.
However, there are other factors to consider.
If you two have kids or you're a single income family, you should focus on having a bigger cushion than if it was just the two of you.
Our Decision with Savings and Debt
If our financial decisions were purely based on numbers, then paying off the debts immediately would be the way to go.
You come out better typically when your debts (like credit cards) have a higher interest rate than what savings can give you.
The problem with that line of thinking is bad stuff happens can happen to any of us, usually at unexpected times.
I've had family emergencies pop up while I was trying to pay off my credit cards. I know it happens, so I tend to encourage people to go ahead and save some money first.
If you’re focused and are putting every single extra penny you have into paying down your debts, you can caught in a bad predicament if you have no savings.
If you have to fix your car or if your dishwasher breaks, then you may be tempted to go back and charge it to your credit card. It can be a discouraging cycle.
Do Both!
Of course, you can also do both at the same time and split your money into savings and debt reduction.
Matt from Debt Free Adventure has a wonderful 75/25 method on paying down debt while saving.
Thoughts on Saving and Paying Debt Off
I'd love to hear from you about how you got started. Did you build your savings first or did you go ahead and work on paying off your debt?
This post was originally published in June 2012. It has been updated in April 2019.
We did both at the same time. Our EF is fully funded now though so we are fully concentrating on debt. I like being comfortable with a full EF.
Lots of people call into Dave’s show with similar sentiments.
But, if you were doing Dave Ramsey’s plan, he has said that he doesn’t want you to be comfortable while you still have consumer debt. He wants you to use the anxiety of a smaller emergency fund to inspire you to get out of the debt more quickly so that you can build your full fund back up.
While a different-sized fixed baby emergency fund is understandable, I don’t follow the reasoning behind trying to fund your full emergency fund at the same time as paying down consumer debt as the author suggests. The idea of the baby emergency fund is that focused intensity can accomplish amazing things quickly. And if you’re trying to do too much at the same time, nothing progresses.
Two examples of segments where he discusses this are at:
http://www.mytotalmoneymakeover.com/index.cfm?event=dspAskDave&intContentItemId=120608
– and –
https://www.mytotalmoneymakeover.com/index.cfm?event=dspAskDave&intContentItemId=116680
I think many people feel the same way. I think as esjay points out, it’s a trade off – faster results or a bigger cushion. Only you can decide what will work for you.
Always doing both myself… but I don’t have any consumer or student loan debt anymore. Just mortgage debt.
I encourage folks to look beyond an EF mentality because it’s a crutch!
I like the mixed strategy myself; paying down debt while still saving something for a rainy day. I know that it makes sense to just get the debt paid off, but it’s just too risky to not have some savings stuck away for emergencies which always seem to happen.
I think $1000 saved is enough, then I’d get aggressive on the debts.
I’d personally pay my debt first if I’m on the situation especially if my credit cards got higher interest than my savings. However, the 75/25 method that you’ve provided is very much interesting! I think I’d be able to achieve good results if I’m going to try it.
I’d highly recommend getting to at least $1,000-$2,000 in emergency funds first. I know that building up my emergency fund has been one of the smartest things my family has ever done and has paid dividends time and time again. I’d say get a small chunk in the emergency fund first, then split 75/25.
Thanks John for sharing your thoughts. We’ve had emergencies pop up that had we not created a financial cushion would’ve slowed us down even more with our goals.
I agree with the DFA method/approach – it’s been pinned in my favorites for quite some time! If you’re simply playing the numbers game, then having a small EF while aggressively paying down debt is the way to go. But unfortunately, emergencies don’t stick to a budget as well as we do…one medium emergency and POOF you may have to go back into more debt.
DH and I have been all over the place with our EF. It was almost a Goldilocks scenario – too small (or non-existent!), too big…but now we’ve got one that’s just right. We used to have a full 6 months of expenses saved up, and it just wasn’t doing us any good. I did the math – it was so much better for us to pull a chunk out to pay down some debt & free up monthly cashflow than it was to get a meager return in our savings account. We’re now at about a 3 month EF.
We’ve also got other savings accounts that we feed into for other purposes – car fund (repairs and purchase), fun fund, student loan fund, gift fund, etc. Having those handy keeps us from actually dipping into our EF for anything other than REAL emergencies. Actually, the only times we have dipped into the EF (other than to adjust from the 6 month to the 3 month level) have been temporary transfers to our checking account to get us through lean moments – there’s times when husband has to float some costs before they get reimbursed, and having that EF as a temporary transfer fund helps to keep us from incurring overdrafts fees or finance charges while we wait for his reimbursements.
I would do both… In my case, I was saving for my MBA and I wanted to save regularly as well. I set a minimum that I would save each month and whatever other monies I was able to round up went to my MBA…