Deciding to start paying off your debt faster than required by the minimum payments is a huge accomplishment. However, many people don’t consider starting an emergency fund before beginning their debt pay off journey. While you don’t have to start an emergency fund first, it may be a good idea depending on how you interact with your money.
Unexpected Emergencies Are Part of Life
Unfortunately, we all experience unexpected emergencies at some point in our lives. Generally, emergencies don’t come cheap. Sometimes you break your leg and can’t work for a couple months. Other times your dog gets sick and needs expensive medical attention. Chances are, those emergencies end up being paid for with a credit card, especially if you don’t have cash in the bank.
So what do these emergencies have to do with paying off debt? Sadly, emergencies affect paying off debt more than you’d think. It takes a lot of courage and effort to start tackling a debt problem. It may even take a few months to start making steady progress. Once progress is being made, the last thing you want to happen is to have that progress grind to a halt. Money emergencies do just that. They disrupt the debt pay off progress and make some people feel defeated.
Why Emergencies Disrupt Debt Pay off Progress
If you don’t have at least a small emergency fund, that emergency expense will likely end up on your credit card. Charging an emergency on a credit card can make some feel defeated and relapse into their old debt accumulating ways. After all, charging the expense may have destroyed a significant amount of progress, so what is the big deal about charging just a couple more items? This mindset can set you back by months or even years in your debt pay off journey. Thankfully, it can be avoided with a simple tool.
Even a Small Emergency Fund Will Help
Even a small emergency fund will help to prevent getting off track in your debt pay off journey. Some financial gurus suggest establishing a $1,000 emergency fund before paying off debt. However, your personal needs may dictate a smaller or larger fund.
Your emergency fund won’t be able to cover all emergencies. That said, even a $1,000 emergency fund should be able to cover many of the minor emergencies that pop up on a more regular basis. Things like an unexpected car repair or missing a day of work when you don’t have paid time off won’t put huge dents in your debt pay off if you have that $1,000 set aside.
Only Use the Emergency Fund for Emergencies
If you have credit card debt, you may not be used to having cash in the bank. Just because you have $1,000 in your savings account doesn’t mean you can splurge on that big screen TV on sale at Best Buy. The money you set aside is strictly for emergencies, not paying for splurges.
I suggest you go ahead and define what is an emergency before you start growing your fund. Generally, I include things like job loss, unexpected medical bills, unexpected car repairs and similar items. If you know there is a major expense coming up, you need to save for it in advance. You know it is coming so it isn’t an emergency. If you do have to take money out of your savings fund, I suggest lowering your debt payments back to their minimums until you can replenish your fund.
Technically, the Money Has a Better Use
If you’re emotional with your money, go ahead and skip this section. If you’re logical like I am, you may want to consider the following.
Any money sitting in an emergency fund is money that isn’t being used toward your debt pay off. If you have credit cards with interest rates of ten percent or higher, it doesn’t make much sense to earn 0.01 percent interest on cash in a bank account. If you know that incurring additional credit card debt from an emergency wouldn’t cause you to spend on other items or deflate your momentum, using cash to pay down a high interest rate credit card makes more sense than leaving it in your bank account.
Don’t Get Lost in the Details
You can debate for weeks or even months how large of an emergency fund you should have. Then, you could do the same when deciding what is an emergency. Don’t get paralyzed figuring out these items. Start with a $1,000 emergency fund and adjust as needed. You’ll be paying off your debt in no time and you’ll won’t be deflated when the first unexpected emergency pops up.
Lance Cothern
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