What is high interest debt, anyway?
When we talk of high interest debt, think of credit cards and other short-term loans with high interest rates. These loans can quickly spiral out of control if left unchecked – as interest is added and the amount that needs to be repaid grows over months and years.
So should these high interest debts be paid off before starting an emergency savings fund? The answer will likely depend on individual circumstances. But there are some general tips that apply.
Strike a happy balance
The cost of high interest debts can be very high – and will likely be much higher than any interest earned on emergency savings. So based purely on earnings versus charges, it is arguably better to pay off these high interest debts quickly and build savings later.
But the catch with emergency savings funds is that they can be essential to call on when crisis strikes and not being able to access such a “rainy day fund” can prove costly. An example might be the need to replace a leaking pipe in a home. If left unrepaired, a flood could follow, causing bigger, more costly problems. So it is essential to have emergency funds on hand to call on. Both are important. Striking a happy balance between paying high interest debt and saving for the unexpected is key.
How big should my emergency fund be?
An eZonomics poll on rainy day savings tells how experts tend to recommend building an emergency savings fund of between three and six months of wages. Individual circumstances, such as size of income and financial responsibilities, will determine the exact size. It explains how steps such as building a budget and setting up automatic payments can help get finances in control.