Save for an emergency fund or pay off debt?

Question

Recent college grad....Should I start saving up for an emergency fund first and then focus on paying down my debt, or should I devote eveything I got to bringing my debt down and worry about an emergency fund later? I have my student loans, which are only about 13k, and a car loan which is under 7k. Not too bad, but it owuld be nice to be rid of the car loan at least.

Answer 1

I would start a "baby" emergency fund of $1000. This will cover most emergencies except loss of a job. This is good finances as well as piece of mind.
Second pat yourself on the back. You did accumulate debt, but not nearly as bad as others (myself included) and more importantly you want to pay it off.
Next you need to promis to yourself that you will not accumulate more debt (outside of a house)
Then pay the minimum on that student loan and attack the car loan with every extra cent you have until it is paid off, then attack the student loans.
Don't get mixed up in credit cards!!!!

If you are a reader (or even if your not), check out Dave Ramsey's "Total Money Makeover" It will detail out the steps to becoming debt free and wealthy - and it works

Answer 2

There is no exact rule on this. Most financial advisors recommend 3-6 months for an emergency fund before paying off debt. However, if you have really high interest on the credit cards, you might consider saving up 1-2 months of emergency funds then hitting the credit cards. Car payments are usually lower interest, and I would probably save up a full 3 months before attacking the car payments. Student loans are usually even lower interest and less of a concern. Always try to pay off the highest interest loan first, then attack the next highest. Giving more advice is difficult, because you haven't told me what the interest rates are on your debt. You also haven't said whether you could survive on one person's salary. If so, you can get by with a lower emergency fund.

Answer 3

Here's the thing: you need to be able to handle an emergency or unexpected expense if and when it arises. You can do this by having a pile of money in a money market fund (great) or by having availability on a low interest bearing credit card (good). You need to make sure you always fall into one of these catagories--or both, preferably.

Don't worry about your student loan debt if you have a low interest rate (below 6%). You might want to go ahead and try to pay your car loan down if you have a high rate (above 6%). I chose 6% because the best savings accounts/money markets are currently earning just over 5%. You'll be doing better to pay down the debt if your savings rate will be lower than the interest you're paying.

Plus if you pay down the car loan, you will have a huge monthly expense gone, which will free up more income and lower your DTI ratio (which is good in case you want/need to get another loan, like a mortgage, anytime soon).

Answer 4

Do both as soon as possible with more emphasis on the emergency fund, then car loan, then student loan. I am guessing that your car is still driveable for at least two years. If so, add up all the deductibles on your insurance short-term disablility, health, car, life, renters etc. That is your emergency fund (should be around $1000), once you have that you will immediately feel a little better. Then go great guns to get the car debt paid off, nothing sucks worse than your car breaking down and still owing on it. Now save some $ for the next car (or at least down payment), still have time before the car dies? now knock out the student loans.
Also, be sure you are adding $50 a month to a mutual fund Roth IRA from day one and start pitching into your 401k at work.

Answer 5

I had even more debt than that after college. I have been following Dave Ramsey's plan. It has been a godsend. I recommend it highly. He says to save $1000 for a beginner emergency fund, then pay off your debts, then save up enough to have 3-6months of expenses for a full emergency fund. He has a great book out (that just released a new addition) called "The Total Money Makeover".

Answer 6

I would in this case pay off the car loan first. Its the least amount of debt, devote yourself to that goal first, then the school loans etc..

Start an emergency fund but have it deducted from your check through automatic deductions but start of with only $50 or $25 per check. (whatever you can afford)

You've been without an emergency fund for this long, a couple of months won't kill you. That's what I would do. But to each his own..as they say...

Answer 7

IMO, you should start an emergency fund, first. Should something happen, you will have something to fall back on.
Always pay yourself first!

Answer 8

Depending on your emergency fund (EF) needs, split between the EF and the car loan.

But the crux of the matter is not really how to divert your leftover savings, but how to increase those savings to erase your debt burden more quickly.

Saving depends on
1) Increasing Income (often less feasible).
2) Decreasing Expenses (often more feasible).

Most people focus on #1, and neglect #2. But most expenses can be decreased dramatically, or even eliminated. Share rent with lots of people, or live at home or in a low-cost area if possible, avoid owning cars in the near future (they suck a lot of money), eat out less, buy less (or better yet, nothing) or secondhand, don't engage in expensive sports/hobbies, no travel/tech gadgets/brand names/movies, etc. Reduce all water, power, phone, mobile + cable bills to the minimum. Analyze your biggest expenses (usually rent/car/food/leisure/bills), and find ways to cut all the financial fat. Since you'll have a lot of extra time on your hands, use it to invest in educating yourself and developing your professional talents/interests/skills so that you can achieve a higher future income potential. Go DIY - don't pay others to teach you.

Live poor - because actually, you ARE poor. By my personal definition, if you need a job in order to feed yourself, you're poor. If you need to worry about what your boss thinks of you, you're poor. If you're in debt, you're in the hole poor. Don't be generous or ashamed - you literally can't afford to be. Be generous and proud after you've saved up some $$$. Extreme situations call for extreme measures. If you compare yourself to other people with lots of debt, you'll feel your situation isn't so bad, but you should be comparing yourself to people with positive net worth.

I only make 18K/year now, but I save about 10,12K - more than 50% savings on income. I've been doing this for many years now, so it all adds up. So despite my low income, I had my basic 1K EF in my first month. I intentionally chose to live in a lower-cost city that didn't require a car, and in the beginning I had to forego a lot of costly urban enjoyments (movies, dining, shopping, etc.). But the payoffs have been tremendous; I don't worry about money or jobs. Plus, I only work part-time now.

If you can find a way to save 1K a month, you'll be well on your way. It'll only take 20 months to pay off all your debts. If you have higher income and can save 1.5K, you only need 13 months to be completely debt-free.

After you pay off your debts, you should continue your hardcore saving for a couple years, (1yr =12K, 2y=24K, 3y = 36K, depends on what your long-term financial goals are), after which you can invest your savings, and your money can start working for you, instead of you always working for money. Then you can ease off on or abandon the Spartan lifestyle. If you're a guy, you might not want to though, because being a Spartan is actually pretty cool. It's good mental & physical training, because it helps to cut away all the consumer materialist crap in life. Makes you focus on what's really important in life - which is ironically, not the money, but yourself, your relationships, and your purpose in life. And coincidentally, all those 3 things suffer when you're working the 9-to-5 grind and spending nearly all of your hard-earned money on whatever.

Best wishes to you -

Answer 9

yeah check out dave ramsey. but the first step is o do the emergency fund.