Is It More Important to Pay Off Debt or Save for Emergencies?


In our Ask an Advisor series, members of Grow’s Financial Advisor Panel answer your money questions each week. Today, CFP Alan Moore, co-founder of the XY Planning Network, explains how to balance two of the most important financial goals.

Q: What should I do first: pay off credit card debt or save for emergencies?

Balancing savings goals and paying off debt requires you to look at both the math and emotional aspects of money. Pure math says to pay off your credit card debt first because you’re paying interest, and prioritizing this goal will save you money. However, having some cash in savings has a positive emotional effect that shouldn’t be understated. Plus, you don’t want to find yourself in a situation where you can’t afford to cover an unexpected expense, and have to rack up more debt.

With these considerations in mind, I recommend this three-step approach to paying off debt and saving:

First, focus on building up your emergency fund savings until you have one month’s worth of living expenses. (That includes necessities like housing and utilities, groceries, transportation, health insurance and child care, but not extras like takeout, entertainment or gifts.) While you’re at it, remember to keep making the minimum monthly payments on your credit cards, so your credit score doesn’t take a hit.

After you’ve saved one month’s worth of expenses, turn your focus to your credit card debt and aggressively pay it off, using either the debt snowball (knocking out the smallest debts first for an emotional boost) or debt avalanche strategy (prioritizing the balance with the highest interest rate), depending on which is most motivating to you.

Finally, once you’ve paid off your credit cards, focus again on boosting your emergency fund to three to six months’ worth of expenses. This is the money you can fall back on in the event of an unexpected medical bill, home or car repair, or in the event you lose your job.

As you’re working your way through this multi-step process, it’s important to find ways to stay motivated. While it can be tempting to get distracted by more fun ways to allocate your dollars, like on nice Christmas presents or a vacation, try to hold off on any major splurges until after you’ve achieved your debt payment and savings goals.

Grow Financial Advisor Panel participants are responsible for the content expressed and do not necessarily represent the views or opinions of Acorns Grow, Inc., Acorns Securities, LLC or Acorns Advisers, LLC. Content is provided on an informational basis and should not be construed as investment advice. Individual circumstances will vary. Please consult a financial advisor before acting on any opinions expressed. Participation in the panel is voluntary. Editing of advisor responses is for brevity and clarity; no editorial privilege is exercised.