It's a common dilemma: Should you put all your spare cash toward paying down debt, or build up your emergency savings-or a little of both?
It's a serious question now. If you lost your job, the average length of unemployment is about 33 weeks-or eight months. That means your emergency fund must be a priority. But should it come first? Let's run some numbers.
Your monthly expenses: $4,000 Your debt: $5,000 on a card at 14% interest You have: $500 to apply to debt, savings or both each month.
If you stashed $400 each month in your emergency fund, and made only the minimum payment on your card-that's $100, assuming a 2% minimum payment-it would take you more than six years to build up eight months' of expenses ($32,000). And you'd still owe about $2700 on your card.
Now let's flip it. If you put $400 per month toward your card, and $100 toward savings, you'd be debt free in about 14 months-and you'd have a tidy $1,400 start to your emergency fund.