TSI #39: Before building an emergency fund, think twice
Mar 26, 2023Hello Stoic Investors,
Today I want to focus on the saving side of personal finance. If you’re reading this, you’re probably familiar with the concept of an emergency fund.
It provides a financial cushion in case of emergencies and can help prevent you from going into debt.
Some say it should cover at least 6 months of expenses.
Here is something to refresh your memory.
Why you need an emergency fund
There are three main reasons why you need it.
Financial security: Having an emergency fund provides peace of mind, knowing that you have a safety net in case of an unexpected event.
Protects against debt: Without an emergency fund, you may be forced to rely on credit cards or loans to pay for unexpected expenses, which can lead to high-interest debt and financial stress.
Avoids dipping into long-term savings: An emergency fund allows you to keep your long-term savings and investments, intact, by covering unexpected expenses without having to raid your long-term investments.
That being said, there is one exception.
When not to build an emergency fund
In February 2023, the average credit card interest rate in the U.S. on accounts with balances that assessed interest was 20.40% according to The Federal Reserve.
Unless you have a guaranteed investment that’ll make you more than that, pay off your credit card first.
Interest charges on credit card debt can quickly add up, making it difficult to get ahead financially.
Once your credit card debt is paid off, then you can resume building your emergency fund.
If you’ve already got a hefty sum of credit card debt, let me help you.
How to get rid of credit card debt fast
The average American had $5,589 in credit card debt in 2022. Here is how you can get rid of that.
-Stop using credit cards and make a budget
-Pay off high-interest debt first (if you have multiple credit cards)
-Make more than minimum payments (devote as much as you can)
-Consider a debt consolidation loan
-Increase income and stay motivated (find a side hustle)
Remember, getting rid of credit card debt requires commitment and discipline. But once you’re free, you’ll feel much better.
So, note down these points and pay off your credit cards in full:
- An emergency fund can offer financial security
- However, you need to pay off high-interest credit card debt first
