Experts Say This Should Be Your Next Financial Priority (After Paying Off High-Interest Debt)
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Daria Uhlig
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Zuri Anderson
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It’s common knowledge that paying off credit cards and other high-interest debt is about the best thing you can do for financial health.
But once you’ve accomplished that, what should you do with your spare cash? Most experts agree that your next financial priority should be to start an emergency fund.
What Is an Emergency Fund?
An emergency fund is a savings account reserved specifically for emergency expenses. You might use it for a major home or car repair, for example, or to pay for medical care your insurance doesn’t cover. The fund can also tide you over if you lose your job or need to take unpaid leave.
Why Is It Important To Have an Emergency Fund?
An emergency fund is important for three reasons:
- It keeps you from having to go into debt to pay for a major, unexpected expense.
- It provides income if you lose your job or can’t work.
- After retirement, it helps you avoid cashing out investments during market downturns.
What’s the Difference Between an Emergency Fund and Savings?
An emergency fund is strictly for unexpected cash emergencies. Regular savings, on the other hand, is often money you plan to spend in the future. Common savings goals include a down payment on a home or car, education expenses or a vacation or other luxury.
How Much Should I Have in an Emergency Fund?
Experts usually recommend having three to six months’ worth of living expenses in your emergency fund. But some argue that that’s not enough. Personal finance expert Suze Orman recommends building up to eight to 12 months. Retirees might save double that amount, according to AARP.
How Do I Start an Emergency Fund?
Start by opening a high-yield savings account — preferably one with no monthly maintenance fee. Then deposit part of each paycheck to build your fund. Setting incremental goals will help you track your progress.
Money expert Dave Ramsey said $1,000 is a good start if you’re still paying off debt. From there you might base your next goal on the 3-6-9 rule for emergency funds. The Chime blog explains how it works:
- Save three months of expenses if you’re single or you and your partner both work, and you have no children or mortgage.
- Save six months of expenses if you’re a parent, you have a partner who works, and you have have mortgage debt.
- Save nine months of expenses if your family is a single-income household, or your income is unpredictable.
After that, you can continue funding your emergency savings while working for other goals, such as saving for a home and investing for retirement.
In an interview with AARP, Kristen Beckstead, a certified financial planner and vice president at First Horizon Advisors in Nashville, Tennessee, said retirees should go a step further, to save 18 to 24 months’ of expenses.
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