I’ve read the reports where the experts say you should have cash for 3 months worth of bills set aside in an emergency fund. Some of these experts say you should save even more than that. If you are living in debt, however, could that money be better utilized in other areas of you finances? What if you send the money in your emergency fund to pay down your highest interest debt? What if you have an emergency after doing so?
To begin, your emergency fund should be placed in a high interest online savings account and getting no less than a 4% return. While many may have their current emergency fund in a low paying brick and mortar bank or even in cash sitting at their home, this is a waste since you are losing on easy to get interest.
It has already been discussed how you can take your savings and use them to reduce your debt (by paying off the lowest interest debt first or by paying off the smallest debt first), but should you take this one step further and include your emergency fund in this debt reduction process as well?
If you use your emergency fund to reduce current debt, that money would obviously save your more in interest paid than what you will make from placing the money in savings account (even if it is a high interest online account). While this is easy to see, It’s still difficult to give up that emergency fund because what if you have an actual emergency and need that money. The answer to this question is simple – you just cleared that much money in available funds from your credit, didn’t you?
Although you hope it won’t happen, if your refrigerator stops working or you need to repair your car, you can put that money back on the credit card that you paid down. Doing this would still keep you financially ahead because you already saved the interest payments on that money when you sent it in the first place. In essence, you are now using you credit card as your emergency fund instead of cash.
You are much less likely to use that credit card for anything unless it truly is an emergency and a lot of people delve into their emergency funds a little here and there for things that they should not. This will make it easier to stop making that mistake and will save you in interest paid as you work your way out of debt.
Everyone wants to have a savings account at some point and an emergency fund to guard against unfortunate occurrences in our lives, but if you are living in debt, that debt, as well as the interest it accrues is your current emergency.
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