Should You Build an Emergency Fund or Pay Off Debt First? Here’s What a Money Expert Says
Written by
Gabrielle Olya
Edited by
Molly Sullivan
Commitment to Our Readers
GOBankingRates' editorial team is committed to bringing you unbiased reviews and information. We use data-driven methodologies to evaluate financial products and services - our reviews and ratings are not influenced by advertisers. You can read more about our editorial guidelines and our products and services review methodology.
20 Years
Helping You Live Richer
Reviewed
by Experts
Trusted by
Millions of Readers
In an ideal world, we would all have zero debt and a fully stocked emergency fund, but for many Americans this is not the reality. If you’re in the all-too-common situation where you have debt hanging over your head and little to no savings in the bank, it can be hard to figure out the best way to use whatever money you do have.
In a recent appearance on the “Teach Me How To Adult” podcast, money expert Jessica Moorhouse gave a definitive answer to the question “Should you pay off debt or build an emergency fund first?” Here’s what she said.
Why an Emergency Fund Should Be Your Priority
Even if you have debt, Moorhouse said building a sufficient emergency fund should always be your financial priority.
“If you do not have cash in the bank, something can happen to throw a wrench in all of your plans and you’re starting on ground zero right again,” she said. “We need to make sure [that having an emergency fund is] the No. 1 priority, even if you have debt.”
Moorhouse disagrees with other financial experts who preach the importance of paying down debt above all else.
“There’s so many gurus out there, they’re like, ‘Pay off your debt first,'” she said. “No, no, no — we need cash in the bank first because if you don’t have cash, something happens, you’re getting further into debt. So you just undid all the good that you did by paying off whatever debt you did.”
How To Balance Paying Off Debts While Building an Emergency Fund
When you’re starting from scratch, building an emergency fund can be a daunting task, but it’s something you must prioritize, Moorhouse said.
“We need that cushion,” she said. “Just give yourself three months [worth of living expenses]. That is the goal when you’re starting from nothing. [When you’re living] paycheck to paycheck, [start by saving up] one month, and then another month, and then another month until you’re like, ‘OK, I’m starting to feel a little bit better, a little bit more secure.'”
This doesn’t mean you can completely ignore your debts during this process, however.
“Continue to pay your debts, but just the minimum balance,” Moorhouse said. “We’re not going to be aggressively paying that off [until you have the emergency fund].”
More From GOBankingRates
