First Comes Your Emergency Fund

You’re trying to be diligent about sticking to your financial plan so you can save for your emergency fund and pay down your high-interest debt. Both are great goals but you only have enough left in your budget to focus on one. Which is more important—emergency fund or debt?

It’s your emergency fund! Why? Because it gives you a cushion to help you get through the little bumps in the road (which always have a way of popping up when you least expect them) without throwing the whole journey off track.

Build a strong foundation Set up an automatic money transfer to your emergency fund account and automatic payments to your credit cards. This way, you don’t have to worry about remembering to do it each month.

U.S. News & World Report Money recommends keeping most of your focus on growing your emergency savings until you can cover six months of expenses.  This money should remain in interest-bearing savings accounts that don’t penalize withdrawals.

What’s the plan? Experts who advise starting with an emergency fund agree—it’s best to start with a goal to save $1000. This gives you some room to breathe. Pay the minimum payments on your credit card debt and give everything else to this account.

Once you’ve reached this goal, set a middle-ground goal, like 3 or 4 months of expenses. To achieve this next level, pay more than just minimum payments to your debt and the rest to the emergency fund.

Keep this up, paying more to your debt and less to your emergency fund until you reach the desired balance. Then, every extra cent should go to pay off your debt.

Will investing your emergency fund in stocks get you to your goal faster? “I don’t recommend investing your emergency savings in stocks,” says Stewart Campbell, an investment services sales manager for Mountain America Credit Union. “You need this money safe and liquid, and there’s too much risk in stocks.”