Pay off debt or build an emergency fund?


It’s difficult to know whether you should’ve started saving, especially if you’re dealing with debt. If you haven’t been able to build an emergency fund, you’re not alone–one in 10 Australians don’t have $2000 saved for unexpected circumstances, despite 90 percent of people aged 18 to 29 trying to save and invest. 

If you’re struggling with financial planning and are looking for some much-needed financial advice, you’ve come to the right place. 

Let’s get to the following commonly asked questions:

  • Emergency fund or pay debt–which is better? 
  • How do I build an emergency fund? 
  • How do I pay off debt faster? 

Emergency fund or pay debt–which is better?

While you should always aim to pay down debt, building your emergency fund is as equally, if not more, important. But why? 

Emergency funds stop you from having to take out high-interest debt in unforeseen circumstances, like losing your job or fixing your mobile phone. By having personal savings tucked away, you’ll prevent yourself from getting into a worse financial situation. 

There are, however, certain circumstances where you should prioritise debt repayment. These are if: 

  • You’re obligated to make regular loan repayments. It may sound obvious, but you should never miss minimum payments and halt paying off your credit card debt to build your emergency fund. If you do, you’ll not only risk a bad credit score, but your loan rates could increase. 
  • You’re stuck with bad debt. High-interest debts can wipe out your everyday money reserves, especially if your card debt keeps building. If this is the case, pay down your debt rather than build emergency savings. We’ll touch on getting started with a debt repayment strategy later. 
  • You need to focus on credit repair. We understand that it’s easy to find yourself in financial hardship, and as a result, your credit score could plummet. While saving for an emergency is a good idea, having a bad credit score can put a stop to your future financial goals. If your credit score is low, paying off credit card debt will go a long way in repairing it. 

How do I build an emergency fund? 

Emergency funds act as a safety net if things go wrong, for example, job loss or car repairs. Rather than being forced to refinance your mortgage or borrowing money you don’t have, you can use your saved money to get yourself out of a sticky financial situation. 

If you have the means to save for emergencies, you need to put a financial plan in place. Start by establishing your annual fees, make sure you always pay the minimum amount set by your card issuer and focus on building savings habits. 

  • Establish your savings goals. Make sure your goals for saving are realistic. Take into account your spending habits and your regular outgoings before coming up with a number. We recommend using a budget planner for the most accurate look at your finances. 
  •  Research saving accounts. As a rule of thumb, look for high-yield savings accounts which give you a higher rate of return on your money compared to standard bank accounts. If you’re unsure of what yield you’ll expect to see, use a savings calculator. This will tell you how much interest you’ll receive on your funds and how much you should put away every month. Start by calculating your saving goals for six months for a short-term strategy. 
  • Set aside extra cash at the start of the month. Money can sometimes run away from us. If your living expenses are high and you’re often left with nothing by the end of the month, put away extra cash on payday. This will stop the ultimatum of saving or paying for everyday expenses. 

How do I pay off debt faster? 

If you’ve decided to focus on paying off debt faster rather than saving money you’ll need to adopt a debt management strategy, depending on the types of debt you’re faced with. Here’s how to pay off debt faster

  • Consolidate your debt. For fast debt relief, we recommend taking out debt consolidation loans. By condensing your multiple debts into one account and using low-interest consolidation loans, you can pay off your debt faster and avoid crippling monthly fees on your credit card balance. If you’re unsure of how much money you’ll need to take out, use a debt consolidation calculator. This is one of the most effective debt strategies. 
  • Use the debt snowball method. Pay off your debt faster by focusing on one line of credit at a time. Start by turning your attention to smaller debts and making regular debt payments. This gives you more equity to begin paying off your larger loans and eventually you’ll achieve debt relief. 
  • Take out a balance transfer credit card. By making a money transfer to a 0 percent interest credit card, your monthly repayment will chip away at debt rather than interest. This not only improves your credit score but makes debt payoff much quicker. 

Summing up 

Whether you’ve started building an emergency fund or you want to pay off one line of credit at a time, we’re here for you. We understand the importance of financial independence. Check out our blog for more financial advice. 

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Disclaimer: The author is not a financial advisor and the information provided is general in nature and was prepared for information purposes only. This article should not be considered to constitute financial advice. Accordingly, reliance should not be placed on this article as the basis for making an investment, financial or other decision. This information does not take into account your investment objectives, particular needs or financial situation.

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