Not having an emergency fund is stressful! What if something happens where you’re forced to take off work and have to go without a paycheck? But wait, having debt is also stressful! We’re always told how dangerous debt is and how interest builds up and so we should pay it off as quickly as possible, right?! So what should you do? Should you build an emergency fund or pay off your debt? This is a commonly asked question and we’re here to give you the Soro answer. A proven step by step path so you can feel confident in managing money and building wealth, at any age and stage of your financial journey.

The Pros and Cons of an Emergency Fund

We all know how important an emergency fund is. Having a stash of liquid cash gives you options. It gives you choices. It gives you freedom. And it gives you safety. You can leave a bad situation and if something happens to you outside of your control, you know that you’ll be ok. The pro list is long and emotional but it boils down to this: An emergency fund helps us sleep peacefully at night knowing we are protected from life’s curveballs.

The con to having an emergency fund is that while you’re in a good situation you might not feel like you need the money right away. It can be hard to motivate yourself to build one up. Essentially, it is a big pile of cash that is sitting there in a High Yield savings account, not invested so it can grow more, and not paying off any debt either. You can’t use it for your weekly groceries and you can’t use it for your next vacation either. Let’s face it- it’s boring. It can be like watching paint dry. It’s incredibly tempting to want to mobilize the money for other uses to maximize any profits or spreadsheet mathematics.

The Pros and Cons of Paying Off Debt

You’ve heard the horror stories. Debt is a dangerous animal. Depending on the debt, it can grow and grow until it spirals into something that seems unmanageable. It can consume you and stress you out, causing arguments at home or a general black cloud over the family finances. Debt can also rob you of any future financial stability or wealth building. If most of your money is going to student loan payments, car payments, and a hefty mortgage, there is little to no money left over for investing, retirement, or general fun spending. 

People will say get out of debt as fast as possible, with intention so that you can move on with your financial journey and actually start building wealth, not just lining the pockets of the billion dollar credit card companies with your interest payments. And they are not wrong. However, as with most hot topics, there is nuance. When you make a debt payment, the money is gone. It lacks any level of flexibility and while you may save on interest payments, if your interest rate is at 6% or below, it comes at a high opportunity cost at missed investing opportunities. 

So Should You Build an Emergency Fund or Pay off Debt First?

First off, do BOTH! You won’t get anywhere on your wealth building journey if you don’t have an emergency fund or debt hanging over you. And no matter what path you choose you always have to pay any minimum payments on your debt or you fall at risk of hurting your credit score and getting hit with late fees. But this isn’t a question of should you or should you not, it’s about what to do first! Soro’s answer? Build your emergency fund. The options and flexibility it gives you is priceless. The peace from an emergency fund rivals that of paying off debt for 2 main reasons. First of all, if you were to lose your job, without an emergency fund you would most likely need to put your monthly living expenses on credit. You would need to take out loans, and rack up your credit card bill just to survive landing you in possibly even more debt than you had before your debt pay off journey. Secondly, you wouldn’t have enough money to continue to pay back any debt you had remaining. You would be hit with late fees, ruin your credit score, and miss the minimum required monthly payments.

When you choose to build an emergency fund first, you would be able to withstand the storm until you got back on your feet. Whether that’s a job loss, an extended leave period, an unexpected medical expense or car repair. Yes, that means at the end of the day you might be spending more money on interest payments than you would’ve otherwise. And your debt might be hanging around a couple extra months. But that’s OK! The risk of what could happen to you otherwise is too great to gamble with. 

How does this rule change by age?

Ok so does this apply if you’re in your 20s? 30s? 40s? In general, yes. An emergency can happen at any age, walk of life, or financial situation. And you need to be financially prepared. Make sure you are always adjusting your emergency fund in accordance with your expenses. If you are single, no dependents, living cheaply in your 20s, your emergency fund will be relatively small and easy to build up fast. If you are in your 30s or 40s, maybe you have higher monthly expenses, dependents, and higher insurance deductibles, your emergency fund will need to be higher as well. Always aim for 3 to 6 months of living expenses and in financially tumultuous times (hello, recession news!) you can even bump it up to 12 months. 

However, as we grow older, debt becomes a bigger threat to us as well. Your income will peak at a certain point, and if you have debt into retirement it is much more difficult to pay off on a fixed income of social security, pension, and any retirement savings. Also, the older we get, the messier life becomes. There is college to pay for, aging parents to take care of, a monthly mortgage, and increasing medical bills. You have less and less runway to pay off the debt and could eat away at years that you could’ve been saving for retirement instead. 

Bottom Line

So, what’s the bottom line? No matter your age, your emergency fund is top priority. Even if you have debt behind you, building up that emergency fund, putting it in a high yield savings account, and not touching it until you really need it- could be the difference between a small emergency and a financial crisis. At Soro, we want the best for you and never want you to end up in a situation where you aren’t fully protected. 

Want the full picture on paying off debt, budgeting, and investing? Then check out our Ultimate Money Guide- it’s built to get you started on your path to financial freedom and hit those money goals!