Surprising coming from a PF (personal finance) blogger?
Anyone who is in any kind of debt that charges a significant interest rate should pay their debts first over saving any kind of emergency fund.
Those who are in credit card debt, would be better off paying every penny they had towards that debt, and using that credit card if an emergency arises.
Frankly they’d be earning more interest savings by clearing a 19% credit card than stashing it in a 1% high interest savings account.
They’d “earn” about 18% more by clearing the card and not having to pay extra interest than if they had $1000 or an EF sitting in a bank account.
YOU WOULD PAY MORE IN INTEREST BY NOT CLEARING YOUR DEBT FIRST
Just look at the math, it never lies:
As you can see, if you have $10,000 in debt that you are paying 19% interest on, you are basically paying $1889.17 a year for nothing if you saved the money instead.
(I’ve obviously taken a few liberties in the math by not also scaling down the amount of debt over time which would also result in slightly lower “lost” payments to interest. This is just a simple, straight forward example to show you that the math doesn’t lie.)
CAVEAT EMPTOR! (Latin for “Buyer beware”)
This only works if you know and do the following:
- You know the difference between an emergency and an impulse (e.g. medical bill = emergency; new TV = NOT)
- You are putting every penny you have that you’d normally save in an emergency fund towards your debt
- You are NOT able to get a high-interest savings account that pays out MORE in interest (e.g. 20%) than your debt takes
- You are able to dip back into the line of credit or credit card if a (true) emergency arises
Otherwise, saving your money into an emergency fund is a silly idea unless you psychologically feel better doing so, and can’t sleep at night unless you have SOMETHING in your bank account, no matter how much money you’re losing each year.