One common financial question I hear is, “should I pay off my debt first, or start my emergency fund?”  An emergency fund should have between three to six months’ worth of expenses.  So if it costs you $3000 a month to run your household, you would want at least $9000 saved.  Saving $9000 can take several months or even years.  But, if you don’t have an emergency fund, then you may put yourself into deeper credit card debt when an emergency arises.  Also, you don’t want to wait years getting your emergency fund built while accumulating so much in interest each day on your debt. So what do you do?

A good compromise is to save for a mini emergency fund of at least $1000 first.  If your budget allows, continue paying off debt while also saving at the same time (usually paying extra on one debt at a time and paying minimums on the rest).  This may require sacrificing a few expenses temporarily in order to stay on track.  Having a budget is the best way to go about this.  For example, at a recent budgeting class, someone said they spend $6.37 on coffee four days a week.  She did the math and found out she spends a little over $100 a month just on these coffees.  In ten months, she can have a mini emergency fund.  And that’s just one purchase.  If she were to cut out something else, such as a streaming service, she can have that emergency fund in under five months.  Or maybe instead of getting her nails done every month, she can go every other month.  You get the point.  Having a budget will help you stay organized and give you a visual of where your money is going.

Many people will be getting a tax refund around this time of year.  While it’s tempting to splurge on something fun, consider this a “bonus income” that you can use towards your emergency fund or debt elimination.   You can start your small emergency fund, and then pay off certain debts with what’s left of it.  If your debts are small, maybe your refund can get you out of debt entirely.  If that’s the case, then you are ready to continue building your emergency fund up to the three months’ worth of expenses.  And maybe start making coffee at home for a few months.

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