Should You Use Your Emergency Fund To Pay Off Debt?
Written by
Cindy Lamothe
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Amber Barkley
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Taking from your emergency fund to pay off debt sounds like a shrewd financial move — but how risky is it? According to experts, using an emergency fund to pay off debt is a decision that requires careful consideration of multiple factors.
“Generally, it’s not advisable to deplete your emergency savings to pay off debt, as this leaves you vulnerable to unexpected financial shocks,” said Abid Salahi, co-founder of FinlyWealth.
However, he said there are specific scenarios where it might make sense. Here’s his breakdown by type of debt to help you make a sounder decision.
Credit Card Debt
Credit cards often carry the highest interest rates, sometimes exceeding 20% APR. If you’re paying such high rates, Salahi said using a portion of your emergency fund to pay off this debt could be financially prudent. “For instance, if you have $10,000 in credit card debt at 20% APR and $15,000 in your emergency fund, using $5,000 to pay down the debt could save you $1,000 in interest over a year.”
This approach, he explained, can work if you’re confident in your job security and ability to rebuild your emergency fund quickly.
However, it’s crucial to maintain a buffer. Keep at least three months of living expenses in your emergency fund, even after paying down debt. “This ensures you’re not left exposed to unexpected costs or job loss.”
Mortgage Debt
Mortgages typically have lower interest rates than credit cards or personal loans.
“Using emergency funds to pay down mortgage debt is usually not the best use of your money,” Salahi said. “The interest savings are likely minimal, and you’d be reducing your financial flexibility.”
For example, if your mortgage rate is 4%, the opportunity cost of using your emergency fund to pay it down is relatively low. “You might be better off investing that money or keeping it liquid for emergencies.”
Student Loan Debt
According to Salahi, your decision here depends on your student loan interest rate and overall financial situation. Federal student loans, for example, often have lower interest rates and more flexible repayment options than private loans.
“If you have private student loans with high interest rates — say, above 7%-8% — using some of your emergency funds to pay them down could make sense,” said Salahi, “especially if you have a stable income and a well-funded emergency fund.”
Here’s a real-world example from one of Salahi’s users:
“Teddi had $20,000 in her emergency fund and $15,000 in private student loan debt at 9% interest. She decided to use $10,000 from her emergency fund to pay the debt, leaving her with $10,000 in savings — still covering four months of expenses — and reducing her debt to $5,000.”
This move, he explained, saved her about $900 in interest over the following year and allowed her to pay off the remaining balance much faster.
Ask Yourself These Questions Before Deciding
“The key is to maintain a balance between debt reduction and financial security,” said Salahi. Before using your emergency fund to pay off any debt, he said to ask yourself the following:
- Do I have a stable income?
- How likely am I to face unexpected expenses soon?
- How quickly can I rebuild my emergency fund?
- What’s the interest rate on my debt, and how much will I save by paying it off early?
- Do I have other, more affordable options for paying off this debt?
“Remember, an emergency fund serves as a financial safety net,” Salahi added. “Its primary purpose is to protect you from unexpected financial hardships.”
In other words: Using it to pay off debt should be a calculated decision, not a desperate move.
“In my experience advising clients, I’ve found that those who maintain a robust emergency fund while strategically paying down high-interest debt tend to achieve better long-term financial outcomes,” Salahi said. “They’re better equipped to handle unexpected expenses without falling back into debt, creating a positive cycle of economic stability.”
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