What do you do? Save money for an emergency, when rates on savings are now well below 1%, or pay off the debt, especially credit card debt which can be at or above 30% per year?
Two schools of thought, one vocal one suggesting it’s irresponsible to forgo an emergency fund, the other, telling us to kill that debt ASAP. One well known advocate in the “emergency fund camp” is Dave Ramsey. He advocates saving a $1000 emergency fund and not rely on your credit cards for an emergency. This may sound nice, but I’ll suggest you look at this a different way. When you owe money, the next dollar you’d put to another use is costing you the highest rate you pay. So if your credit cards range from 12% to 24%, and your payoff plan has 4 years to go, that $1,000 sitting in the emergency fund earning you nothing is really costing you nearly $2000 by the time the last $1000 is paid off. A cumulative 100% interest. (Get a calculator and multiply 1.18*1.18*1.18*1.18 for four years’ interest.) During this time of going after your debt with a vengeance, you should carefully monitor your available credit, and make sure you have enough credit to get you through a potential emergency. Every individual has a unique situation, so the exact cost or savings will be different for you. The goal is the same, to stop paying interest and start earning it.