 Pay
debt or build emergency fund?
|
 Dear
Debt Adviser,
My husband and I currently have several thousand dollars of debt
including installment loans and credit cards. Despite this debt,
should we begin building an emergency fund, or do you think it is
a waste considering that it will take away from what we are able
to pay toward debts?
-- Keary
 Dear
Keary,
Your situation is one that, unfortunately,
a vast majority of America's consumers face. Save or pay off debts? Let's examine
both sides.
You have a valid point when you suggest that putting
part of your current income toward savings takes away dollars that
could be put toward debt.
Even the best offers out there for savings interest
pale in comparison to what your debt costs you in interest charges.
It seems crazy on the surface to keep money for yourself (that you
don't need right now) that keeps you from paying off high-interest
debt. But deep down, often that's really just an excuse to keep
from having to get a plan in place to manage finances.
So, to answer your question, no I don't think having
an emergency fund is a waste, and yes, you need to start building
one.
For consumers who are struggling already, the lack
of emergency funds can be the straw that breaks the camel's back.
An emergency fund acts like the shock absorber in
your car. When you hit a bump in the road, it cushions the impact.
Without them every little bump is a jarring experience that can
make you lose control. Unexpected job loss, medical bills, automobile
repairs, even minor issues like my dishwasher that just died after
only four years of use can push a budget out of whack if you don't
have that shock absorber in place. To make matters worse, often
more than one thing comes up at the same time. Like my leaky upstairs
window and having to replace my rug because my old cat had an accident.
Phew! Remember, all the financial problems you experience will be
magnified with the lack of savings.
Since you are just now contemplating this move, I
suggest you do it right and start with a plan that includes paying
off your debt by a certain date and saving something. How much you
save is up to you. It is really more important that you begin to
build a savings habit than it is to have a set amount in the fund.
Over time it will grow, but first you have to start saving. I also
suggest that you make it automatic and painless. Have the money
come directly from your paycheck before you ever see it. Next time
you get a raise, keep half for yourself and put half in the account
every paycheck. You won't miss it since you never have it to spend.
Once you start to pile up some cash, remember there's a reason
it's called an "emergency" fund. It's not meant to be an account you
can go to when your favorite department store is having a big sale or your husband
wants to take a cruise. These are things you can and should save for if they are
important to you. But they should be separate from your emergency fund. Lastly,
until you are comfortable with your debt load, stop charging. It works a lot better
that way. Good luck!
The Debt Adviser,
Steve Bucci, is the president of Money Management International Financial Education
Foundation and the author of Credit
Repair Kit for Dummies. Visit MMI
for additional debt
advice or click here
to ask a debt question. | 
