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This seems to be one of the age-old questions, doesn’t it? Especially when it comes to tax-return season, this one floods my inbox! “Lauren, is it better to pay off debt or build an emergency fund?”
The easy answer: it depends.
As with most things, everyone’s situation is different. You’ll want to assess your financial health and forecast and make the best decision you can.
Is it better to pay off debt or build an emergency fund?
Once you decide to start tackling your debt and building up your savings, wouldn’t it be nice if there was a clear-cut formula at how to get it done quickly and easily? I’ll do my best to give you a few scenarios, and try to choose the one that fits best for your situation. Sometimes a combination of working to pay off debt AND build an emergency fund at the same time works best.
If you have high-interest cards, focus on paying them off
It seems like most families have carried credit card debt, but during 2020 with people losing their jobs (and let’s be honest, online shopping was lit!), credit card balances are at an all-time high. The average balance on single credit card is over $6,000. Most people have four – that’s $24,000 in JUST credit cards! Add to that your mortgage, car payments, or student loans. The average interest rate on credit cards is 16.15%; those with poor credit may pay over 25%.
This means you are paying more in the long run with these high-interest cards. It will be worth it to you to consider a debt paydown method to pay off at least some of the cards and lower these payments or research some debt consolidation to reduce the amount of interest before building your emergency fund.
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