I’ve seen a few posts around the blogosphere about whether it’s good to pay off your debt first or build up savings.
At I Pick up Pennies, the author doesn’t want an emergency fund until she’s out of debt (I spotted a link to this post at Get Rich Slowly.). It might work for her, but it would scare the pants off of me. Being a primarily one-income household, our emergency fund will be used for insurance deductibles, emergency trips to places, and the big one: Loss of income. Shane and I have maybe a $13k credit limit or so on all of our cards. Yes, we could live off of our cards for six months if we had to. But do I want to do that? Oh heck no.
Sure, if you have a credit card with a high limit, you could probably charge an emergency. But if you’re already deep in debt, adding $1,000 will turn into a lot more by the time you’re able to pay it off.
Karen at Living Well on Less is taking a balanced approach. She’s putting half of her surplus funds toward debt, and the other half toward savings. She and her hubby see a real need to have cash on hand when they move in a few years, and it makes sense to beef up the savings for now.
There is no perfect answer for everyone. You’ll have to decide what works best for yourself, of course.
That said, if I had to give you my opinion (and I will. Cuz that’s what blogging is all about!), I would say that I’d suggest building up at least a small emergency fund before tackling debt could save you a lot of headaches.
Or, if you find yourself in a situation where you’ll need plenty of cash on hand, it makes the most sense to sock away as much as possible while just paying the minimum on your debt.
Popular financial guy Dave Ramsey suggests saving a $1,000 “baby” emergency fund before starting your debt snowball. Having $1,000 in savings will cover most people’s insurance deductibles, cover smallish home or car repairs, and cover you in many other emergency situations. If you’re committed to getting out of debt, then you need to be committed to avoid going further into debt. Having this small savings set aside can be just the ticket.
Having even a small emergency fund in place no matter what might give you a peace of mind. You’ll sleep better. And once you’ve seen you can squirrel away a thousand big ones, you might be motivated to save even more or carry on getting out of debt.
Detractors might say, “But you’ll net more money if you pay off debt first and avoid interest charges, and then put money into savings.” That might be true, especially if you’re fortunate enough to avoid any emergencies (and for the record, when you’re living paycheck to paycheck, ANYTHING can feel like an emergency).
But. To that, I would say, “If you’re so good with money, then you wouldn’t be in debt in the first place.” So there.
We’re within spitting distance of completing our emergency fund. We still have a car loan, and we’ll leave that alone for awhile. We want to have as much savings as we possibly can scrape together, since by now you all probably know we’re having a baby boy at the end of this year.(Yay!)
For now, it’s better for me to have more money in the bank than a paid-for car at this stage.
What’s your take on this?