Having an emergency fund is one of the most important steps to financial freedom, but if you listen to some personal finance pundits, it’s not as important as being debt free. (Dave Ramsey, I’m looking at you.)
When you’re financially free, you’re out of debt and have a 3-6 month emergency fund, but when you’re just starting out your financial journey, you’ll likely have to choose between saving up cash for a significant emergency fund or throwing cash at your debt.
So which should you do?
There are legitimate arguments to each side of the debate; let’s take a look.
Why It’s Better to Be Debt Free
- You don’t owe anyone anything
- Your costs are not increasing every day with interest payments
- You’re building your own net worth
- Your entire financial situation is in your own hands
Why It’s Better to Have an Emergency Fund
- If unexpected expenses occur, you’ve got the money for it
- You will sleep better at night (for real)
- You have less to worry about day in and day out
- In a tough economy, an emergency fund can save you after a job loss
Numbers vs. Emotions
Breaking down these different reasons, it seems like it’s a debate about feeling secure (emergency fund) vs. monetary cost (debt free).
While that may not be the entirety of the discussion, I think it’s safe to say that having an emergency fund will let you feel comfortable knowing that you’re prepared for anything that comes your way, while being debt free allows you to truly build your own net worth.
Pundits like Ramsey advocate starting with a $1000 emergency fund and then attacking your debt. Personally, I think $1000 is way too low for even a starter emergency fund; in this economy, with unemployment so high, $1000 won’t do much at all for you.
I’ve always been the kind to want to sleep better at night and have a formulated game plan for attacking debt, rather than use my safety net to become debt free. But that’s just me.
I want to know what you think. Is it more important to have an emergency fund or to be debt free?
Let me know in a comment below.
