Which Comes First: Emergency Funds, Paying Down Debt, or Investing?

When people first start strategizing with their money and making a financial plan, they are often left confused where to start. Many people focus solely on paying down debt, while others take the time to ensure that they have an emergency fund in place. Some might even take on more debt, like in the form of schooling, to invest in themselves and ensure they can get higher pay in the future.

So, where should you start?

1. Emergency Fund

Most financial experts will encourage you to start an emergency fund or a general savings fund before you start to aggressively pay off debt. This is because life often throws us curveballs. On average, most people have $1,000-$2,000 dollars worth of unplanned expenses every year. Your car could break down or you might need a new hot water heater in your home. These types of expenses can throw even the most careful savers off track. So, the emergency fund is specifically for those moments, the ones that can keep you in credit card debt over and over again.

2. Aggressively Pay Off Debt

Once you have a solid emergency fund in place, you can start to aggressively pay off debt. The best way to pay off debt quickly is to first assess your spending. Track it for a week or two to find your weak points. This could be the fact that you love music downloads or your grocery bills are way too high. Once you identify where you overspend, you can start cutting back until you find an excess in your monthly expenses. Use this excess to aggressively pay down your debt. Remember that once you pay off debt, you can essentially give yourself hundreds of more dollars of income every month. It’s often very difficult to live with less at first, but once you get into the habit, it becomes a fun challenge that has a great reward at the end.

3. Invest

Now that you have an emergency fund in place and you have paid off the majority of your debt, you can use the newfound income in your budget to invest. Talk to a financial advisor to find the best combination of investments for you. You should always contribute fully to get your company match at work if they provide it, and if you work for yourself, be sure that you are contributing the full amount allowed to your retirement accounts. It’s up to the individual how much of your total income you want to invest, but it’s important that you are at least trying to ensure you will have a secure financial future.

Is This Always the Right Order?

I should note that if you ask 3 different financial experts what to do when it comes to debt/savings/investing and which should come first, you might get 3 different answers. The important path to take is the one that works best for you. This could mean investing while you are saving because you don’t have age on your side. This could mean setting up a huge nest egg but only after you have paid off your house. Or, it could mean following the steps I listed above.

Essentially, what’s most important is that whatever stage you are in, you take the time to regularly assess your financial situation to make sure that you have enough of a cushion to fall back on in hard times, but also enough investments to rely on in the future.


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