Couple Money

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.

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