What’s More Important: An Emergency Fund or Being Debt Free?

by Jason Unger

Piggy Bank

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

  1. You don’t owe anyone anything
  2. Your costs are not increasing every day with interest payments
  3. You’re building your own net worth
  4. Your entire financial situation is in your own hands

Why It’s Better to Have an Emergency Fund

  1. If unexpected expenses occur, you’ve got the money for it
  2. You will sleep better at night (for real)
  3. You have less to worry about day in and day out
  4. 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.

{ 6 comments… read them below or add one }

Zak Hancock February 24, 2010 at 7:44 am

In my situation, I am 24 and I have no credit card debt and only student loans chipping in to my net worth, I made the decision to set up the emegency fund. My interest rates are decent (about 5 %) and I have them set up for automatic payments. I set up 5 months of income in my emergency fund, and now I am making double or triple payments on my loans. I did not think it made sense for me to be doing this without 5 or 6 months of income in a savings account however. Inevitably, the engine in my 13 year old F-150 would blow up, and I would not have any resources to buy a new truck. I would have less debt, or maybe even be be debt free, but I would be taking a taxi everywhere. Doesn’t make sense to me. This way I am sleeping well at night, and crushing my debt s fast as possible with the security that an emergency fund provides.

Ken March 3, 2010 at 7:10 am

I think Emergency Fund is a higher priority than being debt free. In fact, you can’t get debt free without one. Without one you go further in debt when the next ’emergency’ happens. I think the emergency MUST PRECEDE being debt free. You must also maintain one after being debt free so you can remain in that position.

Kareen April 17, 2010 at 7:21 am

I have $23K in credit card debt and $106K in a savings account – I plan to take $23 from the savings account and pay off the CC debt. I will be completely debt free since I owe nothing else (house or car).

Spider May 13, 2010 at 2:16 am

Given how hard is to even save $1000 given all my debt payments, I think being debt-free is more important. However, I found that what Dave Ramsey says is true. Once you start paying down debt, something crazy happens, and you end up using your credit card to take care of it. So having that $1000 on hand is really important to keep the momentum going. You gotta understand, Dave’s advice is for people in a real mess. And I’m one of them.

Tom@easyfinance May 13, 2012 at 11:31 am

According to me being debt free is more important than having an emergency fund. As per my opinion, whether you have a FD or mutual fund, you can start it a little later than usual. But 1st and foremost priority should be to become debt free. Because debt originates unwanted trouble, tension and stress and its sort of a curse on human life. So to let go off this trouble we should take prior initiatives first. Once you get out of debt, you can automatically plan for a mutual fund.

Chris September 24, 2012 at 3:33 pm

I just paid off 19k credit card debt I am now working on setting up emergency fund. Just do balance transfers with zero interest until debt gets paid off. Worked for me!

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