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Should You Build an Emergency Fund or Pay Off Debt?

| September 02, 2016
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Debt Management

An interesting headline caught my attention recently. The headline was “Why emergency funds are a bad idea.”

The article takes a snapshot of some averages such as:

  • Average per capita income in the US was $55,800
  • Average savings rate is 5.3%
  • Average household credit card debt was $16,000 with an average 15% interest rate
  • $1.2 trillion in student loan debt

But the Math Does Not Add Up

The basis of the article is that the math doesn't add up for people. Basically implying that  most people are not able to accumulate an Emergency Reserve because they have credit card or other debt to pay off. So instead of saving money that will earn almost 0%, why not earn 15% on your money and work on paying down your credit card debt. Seems if you are losing 15% on your money, it makes sense to get rid of that before accumulating an emergency fund.

Logically, there is a lot of truth to that. Why have money earning close to 0%, when your money will stretch further paying down debt on credit cards. Humans aren't logical as you would know if you watch Star Trek. If everyone was like Spock, then yes, this argument would make sense.

So this really isn't about logic or math, it's about changing behavior.

It's a different feeling when you have had the process of many “little wins” in the form of many months of monthly savings that are accumulating. You are seeing your bank account increase. And yes life happens and there are times you have to dip into your savings. But that dip into savings will not likely change the behavior that you have instilled in saving money.

The Habit of Saving is Powerful

If you are making progress in paying down that credit card versus saving money at a 0% interest rate, you have not established the habit of savings. That's a powerful habit and one I believe builds confidence and leads to building a plan to save and, yes pay down your current debt.

Listen to my full podcast below:

If you’d like help reviewing your investment strategies and saving for retirement, please contact Casey Boland via email [email protected] or 513-598-5120.

Date Posted: 09/02/2016 Advice provided in this article is meant for educational purposes only and financial education is important to us. Before making decisions regarding your personal financial situation, please consult an advisor or conduct your own due diligence. If you would like to discuss your Retirement Income Plan with an HCM Wealth Advisor, please give us a call 513-598-5120. Located in Cincinnati, Ohio, we serve clients in 28 states, and we’d love to help.

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