Should You Pay off Debt or Build an Emergency Fund First?

By PURSUIT of FIRE on in Save Money - Level 3

With all the financial advice going round it can be confusing to know where to start.

Should you pay off your debts before saving for an emergency fund? Or should you try and pay off your debts and save for an emergency fund? Or should you use all your savings to pay off your debts?

With this many options it is no wonder why many people end up in debt and stay in debt.

So I am going to try and make this simple.

Should you pay off your debts before saving for an emergency fund?

If you don’t have an emergency fund at all then you absolutely need to start saving towards one.

You shouldn’t try and pay off all your debts first. After all, what is going to happen when an inevitable emergency happens? Your dog needs an operation and you don’t have insurance, you get a speeding ticket or your car breaks down.

If you have no savings where is that money going to come from? Unless you have friends and family that will begrudgingly bail you out it is probably going to go on a credit card. Which is only going to make your debt matter worse!

Now, I am not saying you should stop paying off your debt and put the money towards savings instead. You need to be paying at least the minimum each month towards your debt. However, any extra money should go towards your emergency fund.

How much money do I need to have in my emergency fund?

The recommended amount to have in your emergency fund is 3 - 6 months of expenses. So if your expenses are £2,000 a month then you need to have between £6,000 and £12,000 in your emergency fund.

However, if you have debt as well to pay off and no emergency fund, trying to save that much money can be a bit of a stretch.

I would recommend trying to save £1,000 or 50% of your monthly expenses which ever is the smallest of the two.

If you don’t know how much you are spending, then check out my Level 1 post on how to make a budget.

Should I use all my savings to pay off my debt?

This will depend on how much debt you have and how big your savings are.

If you have enough savings to pay off your debt or at least a large chunk and have at least £1,000 in an emergency fund then I think it would be worth it.

Once your debt is paid off, you will have more money to save towards your emergency fund and you will probably feel quite a weight lifted off your shoulders.

Should you try and pay off your debts and save for an emergency fund?

If you have read up to this point then I think you know the answer.

Yes, absolutely save for that emergency fund if you don’t have one but make sure you keep up with those minimum payments so you don’t get even more in debt with fees from the credit card company.

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Alex started Pursuit of FIRE in 2019 to try and help people reach financial independence. He has spent nearly a decade working as a software developer in the finance industry and now is looking towards early retirement so he can spend more time with his young family.