Striking a balance between paying off debt and an emergency fund

Dave Kutcher

by Dave Kutcher

Striking a balance between paying off debt and building an emergency savings fund can be challenging, but it is crucial for financial stability and peace of mind. Here are some steps to help you balance these financial priorities:

1. Assess Your Financial Situation

• Budget: Start with a clear budget that includes all income, expenses, debt obligations, and savings goals.

• Debt Type: Identify the type of debts you have (e.g., credit card, student loans, mortgage) and their interest rates. The highest interest cost debts are your main priority

2. Establish a Basic Emergency Fund

• Initial Goal: Aim for an initial emergency fund of $1,000 to cover unexpected expenses like car repairs or minor medical bills. You will build this to more substantive levels moving forward, but this is a good start if you don’t have any emergency savings at this time.

• Separate Account: Keep your emergency savings in a separate, accessible account. Don’t co-mingle funds if you can avoid it.

3. Prioritize High-Interest Debt

• High-Interest First: Prioritize paying off high-interest debt (e.g., credit cards) first, as these can quickly accumulate and become unmanageable.

• Minimum Payments: Continue making minimum payments on all debts to avoid penalties and maintain your credit score. It is vital that you maintain good credit in order to help yourself achieve your goals most efficiently. Sacrificing your credit results in higher interest expenses than is necessary and compounds your difficulty in trying to make headway.

4. Allocate Funds

• 50/30/20 Rule: Consider using the 50/30/20 rule as a guideline, where 50% of your income goes to needs, 30% to wants, and 20% to savings/debt repayment. This formula isn’t perfect but can act as a guide. The more committed you are to digging out of debt and establishing a more secure financial situation for yourself and your family, the more you can commit increasing the 20% toward debt and savings and less toward the “wants” category. Think about your financial goals as one of those “wants” on your list.

• Split Extra Funds: Divide any extra money between debt repayment and increasing your emergency fund.

5. Increase Emergency Fund Gradually

• 3-6 Months of Expenses: Once high-interest debts are under control, gradually increase your emergency fund to cover 3-6 months of living expenses. This is essential to providing you the flexibility you need to navigate whatever comes your way. Having the ability to adapt and change during changing times is crucial to a successful plan.

• Automate Savings: Set up automatic transfers to your savings account to build the fund consistently. Automatic payments toward things like savings ad debt repayment yield the very best results … if you don’t see it, you won’t miss it. You learn to live with what is left over … in other words, save first and spend second. If you work the other way around, there is never anything left over to save. It is just our nature-take control and set things up to occur automatically that will help you reach your goals.

6. Review and Adjust Regularly

• Monthly Review: Regularly review your budget and financial goals to adjust as needed.

• Life Changes: Adjust your plan based on changes in your income, expenses, or financial priorities. If you get a raise at work, as an example, allocate some of that raise toward an increase in savings or debt repayment or even both. Again, if you don’t see it, you won’t miss it. Don’t let yourself get used to having it because it will be more difficult to allocate it away later.

Tools and Resources

• Financial Advice: Consider speaking to a financial advisor for personalized advice.

• Debt Management Tools: Use apps or tools that help manage debt and track savings progress.

By following these steps, you can maintain a healthy balance between paying off debt and ensuring you have an emergency safety net for unforeseen events.

My name is David A. Kutcher, a retired Marine Corp Captain. My business partner in the lower 48 is Richard C. Scott, CLU, LUTCF. For nearly 40 years we have been helping folks with their personal retirement decisions. You can catch us on the radio every Saturday morning, “Retirement in the Last Frontier”, 8:30-9:30 on AM 650, Keni Radio and on Tuesday mornings, KFQD News Talk Radio AM 750 and FM 103.7. Frontier Retirement, 10928 Eagle River Road; Eagle River, AK 99577; (907) 795-7452.