Save or Pay Off Debt?


It’s a common dilemma: Should you put all your spare cash toward paying down debt, or build up your emergency savings—or a little of both?

It’s a serious question now. If you lost your job, the average length of unemployment is about 33 weeks—or eight months. That means your emergency fund must be a priority.

But should it come first? Let’s run some numbers.

Your monthly expenses: $4,000
Your debt: $5,000 on a card at 14% interest
You have: $500 to apply to debt, savings or both each month.

If you stashed $400 each month in your emergency fund, and made only the minimum payment on your card—that’s $100, assuming a 2% minimum payment—it would take you more than six years to build up eight months’ of expenses ($32,000).

And you’d still owe about $2700 on your card.

Now let’s flip it. If you put $400 per month toward your card, and $100 toward savings, you’d be debt free in about 14 months—and you’d have a tidy $1,400 start to your emergency fund.

Now that’s real savings, on every front.

Pay out. What’s your saving-versus-debt situation?

This exercise was inspired by Consumer Reports MoneyAdviser.

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