One question I hear often is, “Should I pay off my debt first or build an emergency fund?”
In most cases, I’d suggest building a solid emergency fund amount. But there are some instances where debts could be paid off sooner. It truly depends on your situation. Allow me to explain with a story.
One of my clients, Trevor (not his real name), experienced a medical emergency, which buried him in tens of thousands of dollars of credit card debt. Interest rates were killing him!
Miraculously, Trevor received a windfall through a personal investment. He used these funds to pay off his credit cards. Only problem was, he also used his savings to cover these payments.
Now Trevor’s cards were reduced to zero, but he had almost no savings in case of an emergency. Can you guess what happened?
Months passed, and Trevor got hit with absurd life expenses. Someone broke into his car and damaged a window, a close friend lost his job and needed support, and top of that, Trevor discovered that he had beg bugs! Can you believe that?!
Dealing with these expenses found Trevor once again relying on debt. He fell into a hole of about five hundred dollars each month, which he was able to pay off during following pay periods.
Good news is, Trevor kept his job and was able to stay ahead of his debts. But it was risky. Assume some horrible, catastrophic event had happened, like a job loss or natural disaster. Trevor would’ve been left with the bills and had zero protection.
If this sounds a little extreme, realize it’s very common. A majority of Americans live this way.
What’s an emergency fund for?
An emergency fund amount is there for unexpected financial setbacks. It’s not for kitchen upgrades, shiny new toys, or a desperately needed date with your spouse (although those are fun).
Emergency funds exist to protect you against traumatic, life-changing events. Some appropriate occasions for safety funds are:
- Medical Emergencies
- Job Loss
- Major Car Repairs
- Home Repairs
- Unexpected Travel for Family Emergencies
- Emergency Pet Care
- Natural Disasters
- Unexpected Legal Expenses
Such situations require immediate attention, often with significant financial consequences. Having a solid emergency fund protects you from these disruptions.
What does the Bible say about emergency funds?
Jesus was clear that life was full of challenges. This includes financial setbacks. We all know the verse:
“I have told you all this so that you may have peace in me. Here on earth you will have many trials and sorrows. But take heart, because I have overcome the world.” — John 16:33 NLT
God is honest enough to tell us that bummers will happen. But we can set ourselves up for success by having an emergency fund amount in place.
With regards to savings, God talks specifically about safety nets when Joseph stored grain during the prosperous years of Egypt. This enabled the Egyptians to weather the worst of the famine. What’s wonderful is this idea came straight from God:
“There will come seven years of great plenty throughout all the land of Egypt, but after them there will arise seven years of famine, and all the plenty will be forgotten in the land of Egypt… … Let Pharaoh… take one-fifth of the produce of the land of Egypt during the seven plentiful years. And let them gather all the food of these good years that are coming and store up grain under the authority of Pharaoh for food in the cities, and let them keep it. That food shall be a reserve for the land against the seven years of famine that are to occur in the land of Egypt, so that the land may not perish through the famine.” — Genesis 41:29-30, 34-36 ESV
In these two examples, God made it clear that bad things happen. But we can take steps to protect ourselves and experience stability.
What is a good emergency fund amount?
Most financial experts agree that an emergency fund amount of $1,000 is a good starting point. A Bankrate survey estimates that 56% of Americans can’t afford that sum in case of an unexpected event.
To set yourself up for success, I recommend storing a decided chunk of cash each pay period. Make sure it’s robust but doable so you can reach $1,000 in 10-12 months. Then, don’t touch it!
If you need ideas on how to build a good emergency fund amount, here are some thoughts:
- Set a Savings Goal
- Automate Your Savings
- Cut Non-Essential Expenses
- Sell Unused Items
- Save Windfalls
- Review and Adjust Your Budget
- Set Up a Savings Challenge
These are just a few strategies. We can dive into more in my online training: Practical Tools Collection. In this training, I’ll help you control your spending, eliminate debt, and find extra cash that’s hiding in your income, spending, assets, and debts. These are supernatural techniques that have helped countless families. I know they will help you too.
Conclusion
There are times to pay off debt, and there are seasons to establish an emergency fund. Nine times out of ten, I’d suggest building a safety net first. But in those rare seasons where interest rates are crippling you, it might be best to prioritize debts, so you can free up some extra funds.