Should I Start An Emergency Fund Or Pay Off My Credit Cards?

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If you have to ask yourself whether you would like to start an emergency fund or make a large credit card repayment, then you are in a fortunate situation. This is one of the more pleasant financial decisions a person has to make in their life.

If you find yourself in the position of having more cash than you currently need, and you are not tempted to spend it, then you could choose between the above options.

Both options have their advantages. It is certainly a cosy thought to know you have made a credit card repayment that has totally cleared your debt. It is equally very comforting knowing you have some money set aside for an unforeseen financial emergency.

We save for all kinds of things. Sometimes it might be a dream vacation, a nice new car, or maybe a big purchase in the market. Those are all nice things but for the good of your personal finance, it is best to start with an emergency fund. What is an emergency fund? It is your financial buffer. Throughout life, the unexpected will happen and sometimes that something is expensive. Your emergency fund is there to protect you.

How much?

How much you need in your emergency fund depends a lot on your personal finance. How much are your bills a month? That is the all important question. If you were not able to work for one month, how much would it cost you to keep your financial position the same as if you had worked? You should take that number and multiply it by between 3 and 6. Three is the riskier but many think that is enough. Six is for those who like to feel very safe.

Regardless of which one you pick it is not just for being out of work. The money can be used for any emergency expense that was not foreseen. That’s how it helps your personal finance, and why it is called an emergency fund.

How and where?

Now that you have your goal amount it is time to figure out how to save it and where. The best course of action is to calculate how much you can contribute to the fund to fill it as quickly as possible. Once it is full you can look at your goals and decide what to do with the amount that was allotted to the fund. That is when you should start saving for other things on your list.

The best way to fill the fund is direct deposit. Many savings accounts will even give you a bonus rate for doing it this way, and keeps you from getting out of the habit of saving to it. Also using direct deposit will open up certain options so you can pick just the right account for the fund’s purpose. It also helps keep your personal finances in order. After all, your personal finance protection is the whole goal of the emergency fund.

Everybody deals their finances in their own way, but an emergency fund is crucial for your financial security. It is worth the effort to find a way to have one that works for you

Depending on your personal circumstances, there may well be other factors in play when deciding whether to start an emergency fund or make a significant credit card repayment. You could always seek financial advice, but you are usually the best arbiter in this situation because you know exactly what’s happening in your life, and you always have your best interests at heart.

Considerations in the emergency fund vs. credit card repayment debate:

1. How are you currently dealing with any outstanding credit card debt?

   If the answer to that is “very well, thank you,” then you may not need to divert your extra cash towards lowering that debt. However, if you are barely able to meet your minimum payment, are stressed up by not being able to, and a high rate of interest is piling onto the remaining debt every month, then taking a chunk off that burden with your extra cash would sound like a good idea.

2. What rates of interest are you dealing with?

   This applies to both your credit card debt and any interest that may accrue should you place your extra cash in a savings account. If you are being hit by high interest on your credit card repayments, you should probably try to reduce it with the extra cash. If you have a low rate credit card deal, perhaps as a result of a recent balance transfer offer, then you will gain more by keeping your cash in a savings account as an emergency fund – providing it gives you easy and instant access.

3. No one has a crystal ball, but we can all make good guesses based on what we know now and what has happened in the past.

   For example, if you are driving an old car that keeps breaking down, you can reasonably expect to have more garage bills in the near future, and you may even have to look to purchase a new car at some point. In that’s the case, you should keep some cash to one side in an emergency fund. You may also have inklings about your job situation that give you cause for concern. If a round of redundancies has been announced and you’re not sure if your head is on the block, then keeping an emergency fund is essential, whereas a large credit card repayment is not so. If you do ever need extra funds, it is better to tap your own ready cash than the available credit on your card. After all, you’re hardly going to charge yourself interest.

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