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Decoding Financial Priorities

Should you save for an emergency or pay off high-interest debt?

Part 14 | Reading Time: 3 minutes
By Thomas Anichini, CFA®, CFP®
Judging by free financial advice available on the web, most sources recommend saving before paying off debt. At 3Nickels, we don’t necessarily agree. First, we don’t believe you should make that decision without considering how high your debt’s interest rate is. Second, there is a distinguishable difference between Emergency Savings and saving and investing for other purposes, and other financial advice seems to lump them all together. Finally, there is no universal rule that applies to everyone, which is why we recommend true Holistic Advice: to find the best plan for you.
How should you decide whether to prioritize paying off high interest rate debt or saving to an emergency fund? Emergencies are not something you want to face unprepared, but the impending crippling debt of a high interest loan or credit card balance is nothing to scoff at.

Factors to consider

When you start to tackle that budget and make the decision on where to put your money, some factors to consider include:
How high is the highest interest rate on your debt?
How much of your credit limit are you using?
How stable do you think your income is?
How high is the highest interest rate on your debt?
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The higher the rate, the better off you will be when you have paid that debt off. In 2023 we label rates above 8% as “high.” (Previously we drew the line lower, at 5%.) The higher your debt’s interest rate is above this threshold, the more urgent it is for you to pay off.
How much of your credit limit are you using?
The paradox of credit is the more you need it, the less you can obtain and the more it will cost you. To improve your credit score and reduce the cost of future borrowing, it might help you to pay down existing debt. If you plan to take out a big loan soon, you might wish to prioritize paying down debt so you can obtain a better rate on your loan.
How stable do you think your income is?
If you think you are in danger of losing your job or your employer is not doing well, it is better to have some cash on hand in case you lose your income. This argues for prioritizing an Emergency Fund (typically defined as 3 to 6 months’ worth of expenses).

If instead, you feel your employer is stable and your income is not in danger, if you have high interest rate debt you should feel free to pay it off before saving into an Emergency Fund.

It doesn't have to be either/or
You can plan both to save to an Emergency Fund and to pay off high interest rate debt with the 3Nickels mobile app. Just move Emergency Fund to a higher priority than Pay Off Debt, then specify a time for the Emergency Fund goal that will leave some money each month for paying down debt. Suppose you want an Emergency Fund of $12,000. If you set $12,000 as a target and set your time horizon by picking a date in 2 years, your advice will include saving $500 each month to your Emergency Fund, and any money left over may still be applied to Pay Off Debt or any other lower priority goals.

3Nickels helps you craft the best plan for your priorities

There is no universally correct answer, which is why 3Nickels Holistic Financial Advice allows you to decide. 3Nickels’ starting priority is to favor paying down high interest rate debt over saving to an emergency fund (typically thought of as 3 to 6 months’ worth of expenses), but after your first run of financial advice, you get to decide how to prioritize goals. 3Nickels distinguishes saving for an Emergency Fund from other savings goals, such as for college, for a vacation, or for a downpayment. There is no universal right answer that applies to everyone and that’s okay, so 3Nickels helps you find the answer that works best for you.

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