In this economy, which would be better? Pay off debt (loans, credit cards, etc.) or save 3-6 months worth of living expenses? -Megan
This is a great question, and it evokes my favorite response: it depends :).
Generally, I would recommend that you first build up a little savings for an emergency fund just in case emergencies happen when you are paying down consumer debt. Then, in most normal circumstances, I would say it is best to pay off your revolving debt and other liabilities before making substantial contributions to your savings, emergency fund or otherwise. This is because you will have so much more momentum built up after paying off your debts and more money to work with than you would if you were trying to save and make minimum payments at the same time to keep from falling behind and going into default.
After you’ve paid off your consumer debt, put the money that was going out in the form of minimum or extra monthly payments towards beefing up your savings. Use the same focused intensity you did to pay off your debt to also build up your savings.
Now for the “depends” part: if there is a major event looming in the not too distant future, I would not work on reducing my balances until I had enough to cover that event or good insurance (coupled with a bigger savings acount) that would cover it. If there was a good possibility you are going to be losing your job or if you are going to be having a baby in the next six months, if you know you might not get severance pay or you don’t have maternity coverage, than it would be best to save up for possible unemployment or to pay for your baby’s delivery. You’ll want to consider possible upcoming “major events” on a case-by-case basis and then decide what you feel most comfortable with in your own unique situation.
Notice that I never said anything about the economy? The reason is that it is only your home economy that matters when making this decision. Each home economy is going to be different and one person’s priorities or circumstances may not be the same as another’s. Some people are going gang busters in “this” economy and others are really struggling.
Evaluate your own situation, get sound advice and move forward with a plan. It is when people don’t have a sound plan and stick to it that they get burned.
I would love to hear what you would do. Would you go ahead and beef up the emergency fund or get down and pay off debt?
Jesse Paine is a licensed attorney who owns his own law firm. He’s married to Crystal and is the numbers nerd of the MoneySavingMom.com team! If you have a question you’d like him to answer in a future column, you can submit it here.
The content of this column intended for informational use only and is not to be construed as providing legal, investing, accounting or other professional advice. Your situation is factually specific and you should accordingly seek qualified professional counsel concerning your specific legal, investing or accounting needs.