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Deciding whether to pay off debt or save for an emergency is an important choice to make, but you might be able to do both.
Since the pandemic’s start in March 2020, 42% of credit card holders who already had debt have seen the amount grow, according to a September 2021 Bankrate survey of 2,400 U.S. adults. Meanwhile, only 4 in 10 Americans have enough savings to cover an unplanned expense of $1,000, according to a separate Bankrate survey from January. Bankrate, like NextAdvisor, is owned by Red Ventures.
The most important thing is to take an honest look at your financial situation and then put helpful habits in place immediately, according to two experts we talked to. Here’s what you should keep in mind as you make your own plan.
What to Consider When Deciding
You want to look at the interest rate on your debt and allocate your cash accordingly, says certified financial planner and financial psychologist Brad Klontz. If your rate is low, you could split 50/50 between debt payoff and emergency savings, and if it’s high, you could do 90/10 with a focus on debt. “When the habit’s in place, you can then shift how much money you’re putting in each direction, but you’ve set all the pipelines up,” says Klontz.
At the same time, you want to do what makes you feel successful on your debt-payoff journey, says Summer Red, AFC®, education senior manager at Association for Financial Counseling and Planning Education. “I would probably have less emergency savings so that I could pay off that debt faster,” she says.
When You Should Build an Emergency Fund First
Ideally, you would have at least a baseline emergency fund, but if you don’t have any emergency savings at all, it’s a good idea to save some money right away. While experts generally recommend at least three months, you don’t necessarily need that immediately. Start by saving enough money to help cover an unplanned expense like a car or home repair, or a big medical bill. “Then it might be time to approach paying down debt,” says Red.
Once you’ve saved some money for emergencies, take care to leave it untouched and only for emergencies. “If you’re not maintaining your car, so it breaks down every other month, you might be using your emergency fund for something that may not be strictly …….
Source: https://time.com/nextadvisor/credit-cards/pay-off-debt-or-build-emergency-fund/