The answer may surprise you.
- Paying off your credit card debt should be your top financial priority as most credit cards have high interest rates.
- You should still focus on saving money from your emergency fund, even if you are paying off your credit card debt.
- Without an emergency fund, you can be trapped in a cycle that is difficult to get out of.
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When you’re working on paying off your credit card debt, it’s really tempting to spend every extra dollar on that goal. After all, the interest rate on credit cards is quite high, and the sooner you pay off the balance, the more you will save on finance costs.
But there is another financial priority that you should focus on, even when you are working to pay off what you owe. You must set aside for an emergency fund, even if you are sending extra money to lenders.
Why an emergency fund is important when paying off credit card debt
Accumulating an emergency fund before additional credit card payments is really important for a simple reason. Lack of urgent savings can push you back into deeper debt and negate any progress you make in paying your credit card bills.
You see, emergencies stop happening simply because you are trying to get out of debt. Unexpected expenses occur for most people on a regular basis. And if you send all of your extra money to your creditors, you won’t have the money to deal with those costs when they arise. In this situation, it is very likely that you will have no choice but to shift the unforeseen expenses to the very credit cards that you were trying to pay.
It may not seem like a big deal, but the reality is that saving and saving to pay off credit card debt can be really demoralizing, only to see your hard work wear off when unexpected expenses arise. You may end up becoming disenchanted with your efforts to pay off your debt. This can make you less disciplined when sending additional payments in the future, as progress can start to seem out of reach.
This problem can recur every time an unexpected expense occurs. This can leave you trapped in a vicious circle where you pay off some of your debt, face big unexpected costs, and end up returning to where you started, or worse. Obviously, this is best avoided in order to be prepared for emergencies. and you will see that your credit card balance continues to decrease as you start working on paying off your debt.
Ideally, the emergency fund should have living expenses of three to six months, but you probably won’t want to put off additional payments on your cards until you have accumulated such a large fund. Instead, it’s best to save between $ 500 and $ 2,000 from an emergency seed fund (depending on your income and how long it takes you).
Your little emergency fund should be enough to cover most of the surprises that might arise, without having to reach for cards again. Once you’ve done that, you can focus on paying off your credit card early and sending extra money to your creditors without worrying about ending up in debt again if something goes wrong. You can stay on track in your payout efforts as you will be more motivated to do so once you see your balance decrease permanently.
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