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Deciding Which Comes First: Savings, Emergency Funds or Debt

Everyone wants to be on top of their finances and it sounds so appealing in theory, but where do you start? Your savings, your outstanding debts, and building an emergency fund are all very different aspects of your finances that need individual attention. Attempting to simultaneously put in place a plan to fund all three at once can be difficult and stressful.

If your options are limited, you may feel as though the situation is helpless, while having too many options can be overwhelming. You may be overthinking it, and the simple solution is a step by step approach that addresses each one of these vital parts of your financial health individually.

Establish an Emergency Fund

This is an important step in gaining some stability and peace of mind in your financial life, and it is crucial to start saving as soon as it’s economically feasible to do so. If you don’t have an emergency fund in place, the moment an unexpected expense comes along, you will need to break out the credit cards to cover it, which means more debt. Being in a perpetual cycle of debt can be as stressful as it is frustrating, but planning ahead can help you avoid these headaches.

About $1,000 is a good amount to stash away as your rainy-day fund. That should be enough to handle most of life’s unexpected expenses, like a trip to the ER, a last minute flight during a family emergency, or a trip to AutoZone or the mechanic if you experience car troubles.

If your emergency fund is depleted by a sudden expense, put your ongoing saving and debt-reducing strategies on hold until it’s been replenished. Once you have your rainy-day fund back, you can work on building up a more substantial nest egg. Make small goals for yourself, like saving enough to get you by for 1 month of expenses, then 3, then 6. Hopefully you’ll never need it, but it never hurts to prepare.

Refinance Your Debt

How much do you currently owe? If it’s a lot of debt you’re dealing with, you may want to consider looking for ways to reduce that debt before you continue paying it off. Perhaps you can refinance to get a lower interest rate for things like car title loans, mortgages, and student loans.

Make sure that your new loan doesn’t extend the terms of your payment plans when you refinance, because the longer the loan period extends, the more interest you will pay. Once you refinance, continue making your regular payments and as many extra payments toward the principle as possible to reduce the length of your loan. 

Don’t Neglect Your Savings

You have a little money set aside for a rainy day and you’ve managed to rein in your debt load, but you’re not quite out of the woods yet. You still have to start saving for retirement and create a payoff plan that works for you. With the advancement of modern medicine, people are living longer and healthier lives, and Social Security is far from enough to get by on, especially if you are unable to work in your later years.

Since saving for your retirement is a long-term approach, the earlier you start saving, the better. Setting aside a small weekly amount for 40 years will provide more retirement funds through compounding interest than setting aside sizable amounts for 20. Start making serious strides towards a future of financial stability. This may be easier said than done when you’re looking for financial stability in your more immediate future, but half the battle of getting ahead is simply getting started.

Make a Game-Plan

You’ve got an emergency fund prepared, you’ve started saving for retirement, and you’ve refinanced your debt. Your next step should be towards your debt-free tomorrow. Are there simple lifestyle changes you can make to reduce your living expenses or ways of increasing your income in order to better balance your debt to income ratio?

Examine your earning and spending patterns and work from there. If you need to increase your income, you may want to consider finding a side hustle, asking your current employer for a raise, or begin looking for a higher paying job. If you’re trying to decrease your living expenses, review your spending habits carefully. Maybe you order Domino’s at the office every Friday, or you have an LA Fitness membership that’s going unused. Perhaps your car insurance or your cable or internet rates have been steadily climbing. Allocate any money that you’ve cut from your budget and put it all toward paying off any outstanding balances.

After you’ve got your debt wiped out, put the money you were spending on monthly payments toward your savings, so you can start focusing on your future instead of paying off past debts. Where there’s a will, there’s a way, and with a little discipline and determination, you’re sure to find yourself back on the right track towards a secure and debt-free future in no time.