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Pay Down Debt or Build An Emergency Fund?

An emergency fund and elimination of expensive debt are the bedrocks of financial stability.  A common question is – which to concentrate on first, paying off credit card balances or putting money in a savings account? The latest 3 month trend from BankRate.com reports variable rate credit cards trending at about 17%.  In comparison, the best current savings deposit  account rates are only paying about 1.85% .

Paying credit cards balances in full will allow you to keep more of your money instead of losing it to interest charges. If credit card balances are not paid in full, the interest meter continues to run, even on new purchases. In addition, keeping credit card utilization ratios to 25% or less is helpful in building a credit score.

But when the unexpected hits, without an emergency fund, the tendency is to fall back on credit card or other expensive loan options. An emergency fund  of 3-6 months of living expenses provides a nice safety net. Saving that much can take time and planning. Automatically depositing a little bit from each paycheck into a savings account is a good first step.

So for many, the most cost effective answer is to concentrate on paying off high cost debt while also setting aside a bit for savings. This may call for some challenging spending decisions, but it is the path towards financial stability.

If you would like a free 1-1 education session with a Florida Master Money Mentor to discuss developing a spending/saving plan or get answers to credit questions, contact Lisa at 813-744-5519.