Paying Off Debt Vs. Saving For Emergencies

Save for Emergencies or Pay Debt?

Debt or Emergencies

A question that I am asked on a regular basis is whether or not I believe you should start saving money while you are still paying off your debt. My answer is always a resounding YES!

Many people may argue that you will end up paying more in interest on your debt than you will make with your money in a savings account and while this may be true for most, it shouldn’t deter you from saving.

Why is an emergency fund important?

Having an emergency fund with cash readily available at all times is crucial in ensuring that you don’t add even more debt to the existing pile when an emergency comes around.

It’s not a matter of if a true emergency is going to present itself, it’s a matter of when. Your car could break down, you may have to take time off work due to a serious illness, or you may get let go from your job all together. All of these situations are considered an emergency and having money set aside for them will be extremely beneficial to your financial situation.

Why not pay off debt first?

Although I whole-heartedly believe that paying off debt should be your top priority, I also believe that saving money is very important and is something that should not be left until you have “extra” cash lying around.

If you decide to focus all of your resources on eliminating debt and completely ignore your savings, what are you going to do when an emergency comes up? It’s likely that you will whip out your credit card to pay for the issue(s) and there goes any progress you have made on your debt repayment.

How much should you save if you are paying off debt?

It’s often suggested that an emergency fund have enough money to cover at least 3 months worth of your basic living expenses (rent/mortgage, gas, hydro, etc. – not entertainment, clothing or eating out). However, when paying off debt at the same time as building an emergency fund, it’s recommended that you only have a pre-determined amount of money set aside for just one or two emergencies.

A good amount to set aside would be $1,000. This is enough to cover most small emergencies. However, if an even bigger emergency presents itself (like a job loss), this amount won’t get you far. So, make sure you get that debt paid off as soon as possible so you can grow your emergency fund to a much larger amount.

It doesn’t matter how much you’re in debt, you should always have a bit of extra money set aside for those things that will pop up when you least expect them to.

Build a small fund of $1,000 or so and then leave that money alone and focus all of your energy on getting your debt paid off. Only once the debt is gone, should you consider adding more cash to your emergency fund.

What are your thoughts on paying off debt versus saving for emergencies? Please share in the comments.

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Posted on, April 16, 2012
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Comments
  1. krista says:

    I have been on mat leave 2 years in a row with just enough work time in between to get it for the second time. We had a lot of debt to pay off and got it all paid off within a year even though I was on mat leave. we made a budget and cut out all extras including going out. People told us we needed to have fun sometimes that life is too short but we are now debt free with an emergency fund of almost $5000 and can have lots of fun now! It was worth not going out to dinner and movies ect because now with a new budget we can do what we want to and still save!

  2. I agree with you 100% Cassie when it comes to Emergency Funds vs Debt. I am asked the same question and I believe BALANCE is key for everything in life. If you budget your money, pay down your debt and put money aside for an Emergency Savings even it’s only $5 a month it’s better than nothing at all. You should always have some liquid assets even for the small challenges we face in life that may crop up as an emergency.

    Once you pay off your debt you can channel more money into your emergency savings account until it’s to a level that makes you sleep at night. If we fail to set any money aside, you are correct the first place we will turn is to the credit card,line of credit, family etc and keep on digging the hole of debt.

    Mr.CBB

  3. JoAnne says:

    I agree to have savings set aside, regardless of your debt. However, I don’t necessary believe it should be used only for emergencies. I personally resent only paying off debt and not having any money for other uses; ie “wants”. Sometimes it is nice to also save up for something special.

  4. Cassie says:

    JoAnne: I am a firm believer in paying off debt before indulging in wants, but I also believe that you should also set aside SOME money for little extras. When we were paying off debt, we had an “allowance” of $25 each per month. We would usually save it up for a few months to buy something we wanted.

  5. Lorna says:

    I am single and always prided myself on looking after myself which I did well…I bought a very modest home in a neighbourhood that allowed me to walk to work daily and I saved money on transportation costs this way. By keeping my mortgage payments constant I paid off my home 5 years earlier than expected. I paid myself first by participating in RRSP contributions and did go out with friends occasionally, however did not take expensive trips. I was very content to visit my parents and brother who lived out of town for weekends away. Now, however, the tables have turned. I have lost my job and my health is not what it should be, I owe a $10,000 loan and coincidentally received a bequest of almost the same amount. As much as I would like to pay it off and throw myself on the tracks, I cannot do that. I am taking measures to save on everyday things as much as possible, buy only things I truly need with coupons whenever possible. Lesson here is do your best, keep as positive as you can and do not let your friends try to convince you to do things you cannot afford to do (which is nearly everything with a dollar value attached to it!!) and try to find things you are good at doing that you never really thought about that may help you earn some revenue. I was never Frivolous but I am certainly Frugal now….I think finally if you don’t have a partner to shoulder the responsiility as in my case, try to find the resources out there that may be beneficial in aiding you to make the wisest decisions you can. My foremost goal is to regain health enough to full time employment and in the meantime find some form of support until I do. If I were doing it again, I would put more into liquid assets, and less into RRSP.s

  6. Sharie says:

    I totally disagree. Make your money work for you. Why pay interest on borrowed money? Borrow in an emergency. That is pretty much the only time I would borrow. That is what it is there for. I can not IMAGINE paying compound interest on a loan unless I was making better returns through investments. I think this was poor financial advice. Sorry :(

  7. EbyKat says:

    It depends on what kind of debt you are talking about. Something like a car loan with a lower APR, then yes, having a savings is a good idea. Especially because once you pay off that money you aren’t ever borrowing it back if there is an emergency. However, Suze Orman counsels and I quite agree, if you have credit card debt put ALL the money you can into paying it off. That $1,000 of emergency money in the span of a year can save you HUGE on your APR. If there is an emergency you can use that card and pay the APR on it then. Yes, it is a setback, but in the meantime you Are saving yourself that interest.

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