Debt Payoff or Emergency Fund – Which comes first

In this post, we will look at whether you should focus on paying off debt or focus on building your emergency fund. But first, let’s define what each of these things mean.

A debt is something you owe to someone often in the form of money, such as a credit card bill.

An emergency fund is a pool of cash set aside specifically for life’s unexpected expenses, such as car repairs or getting a crown on your tooth. The latter happened to me recently and it cost a whopping $2,500! (Thank goodness for my emergency fund).

There are many strategies and approaches to the age-old question of “Which comes first?”

But you are here reading this post, so you are going to get my perspective:

There is no right or wrong approach.

I know, I know. It seems wishy-washy. But truth be told, we are all in different situations with different debt-to-income ratios (i.e. how much debt you have compared to your income), different debt amounts, different employment conditions, different family situations. Whether you live in a city or regionally may also come into your decision-making process.

There is one thing most people will agree with and that is: debt can make you feel powerless. Helpless. In some cases, hopeless. Large amounts of debt can lead to significant financial stress.

So then, it is important to start paying off your debt. Now.

Follow these steps to start your debt payoff journey.

1. Write down all of your debts – the amounts and the interest rates

2. Identify if there are any debts that can be paid off immediately (e.g. with your next pay check)

3. Create a debt payoff plan as part of your budget. At this step it is important you review your expenses. Do you go out to eat twice per week and spend $50 each time? Consider eating out once per week at a $50 cost. This will give you an extra $216 per month to put towards your debts.
   Quick side note, see how I didn’t suggest that you stop going out to eat altogether? We are human and our habits are hard to break. It is easier to take a slow and steady approach; it is more sustainable in the long run. However, if you can reduce eating out from once a week to once a fortnight, that will give you an extra $324 per month to put towards your debts.

4. Every pay day, use your budget to direct your money where to go.

5. Be consistent.

You may be able to start building your emergency fund up at the same time as paying off debt. Contributing even a small amount each pay will give you some peace of mind.

You can only afford $50 a month? Great, do it. Put that $50 into a separate bank account and do not touch it unless you have a true emergency.

Having an emergency fund will:  

• Stop you from accruing more debt

• Increase your financial security / financial peace

• Help you avoid a financial crisis

This will take time. But you have to start somewhere.

Slow and steady wins the race. Good luck!