Our Money for Life Coaches get a lot of questions about how to prioritize spending, how much should be spent in each budget envelope, etc. In the last couple weeks, the most frequent question seems to have been, “Should I work on eliminating my debt first, or building my emergency savings?”
When building your spending plan you should allocate funds to debt reduction, as well as, to your emergency fund and other periodic spending envelopes. It’s great to have a goal of reducing your debt as quickly as possible, but it is just as important to set aside money for your periodic expenses and your emergency fund at the same time.
If you are not building up your emergency fund, what will you do if an emergency occurs? How will you fund the costs of that emergency? Pay with a credit card? Most people probably would pull out the credit card, but that just increases the debt that you have been working so hard to reduce. The cycle is repeated and you are back at square one with an increased debt load and still no emergency fund.
If you work on reducing your debt, at the same time as building an emergency fund and funding your periodic envelopes (such as home maintenance, car maintenance, etc.) you will be in a much better financial position to handle
any emergency that comes your way.