Question:
We’ve recently had to tap into our emergency fund for both cars and home repairs, and emergency vet visits. We also have some debt on our credit cards from the planned purchases before the emergencies occurred. I want to build up our emergency fund again, but my wife wants to pay off the debt. What do you think we should do first, or how do we balance both?
Answer:
While it might seem counterintuitive, we, generally, recommend paying yourself first. We recommend that you do not stop saving for retirement, and definitely do not stop contributing to your 401(k). We see investors halt their investing to pay down debt, but once the debt is paid, they get accustomed to a higher paycheck and never return to saving.
Before you begin saving to the emergency fund again, however, you should consider paying down the credit card debt. Credit cards can carry an interest rate of 18% to 24%; therefore, we think you should pay this debt as quickly as you can. Also, by paying off your credit cards, you increase your line of credit. If you do have another emergency, you should be able to rely on that line of credit.
When paying your unsecured debt, there are several methods to choose from. You must pay the minimum amount due on all your credit cards. Then, put your extra cash toward the credit card with the highest interest rate. This should save you money in the long run, as you should pay less in interest. Another option is to pay the card with the lowest balance first. Sometimes decreasing the number of outstanding balances you owe provides the mental reassurance that you are making progress on your debt.
If your credit is good, you may consider transferring your balances to a card that offers a 0% introductory interest rate. If your debt does not accrue interest, you should be able to pay it off in the six months or year, before the card begins charging you interest. A final option may be to obtain a home equity loan to pay off the unsecured debt. With a home equity loan, your interest payments may be tax deductible. However, you may want to carefully consider this as the housing market is still slowly recovering.
At Henssler Financial we believe you should Live Ready, which includes knowing how to balance paying down debt while still saving for your future. If you have questions regarding your savings strategy, the experts at Henssler Financial will be glad to help. You may call us at 770-429-9166 or email at experts@henssler.com.
Disclosures
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
