"Do I pay off debt or build an emergency fund?"
It's an important question.
Greetings Prosperous Souls,
One question I hear often is, “Should I pay off my debt first or build an emergency fund?”
In most cases, I’d suggest building an e-fund first. But there are some instances where debts could be paid off sooner. It truly depends on your situation. Allow me to explain with a story.
One of my clients, Trevor (not his real name), experienced a medical emergency, which buried him in tens of thousands of dollars of credit card debt. His interest rates were killing him!
Miraculously, Trevor received a windfall through a personal investment. He used these funds to pay off his credit cards. The only problem was, he also used his savings to cover these payments.
Now, Trevor’s cards were reduced to zero, but he had almost no savings in case of an emergency. Can you guess what happened?
Months passed, and Trevor got hit with absurd life expenses. Someone broke into his car and damaged a window, a close friend lost his job and needed support, and top of that, Trevor discovered that he had beg bugs! Can you believe that?!
Dealing with these expenses found Trevor once again relying on debt. He fell into a hole of about five hundred dollars each month, which he was able to pay off during following pay periods.
Good news is, Trevor kept his job and was able to stay ahead of his debts. But it was a risky decision. Assume some horrible, catastrophic event had happened, like a job loss or natural disaster. Trevor would’ve been left with the bills and had zero protection.
If this sounds a little extreme, realize it’s very common. A majority of Americans live this way.
What’s an emergency fund for?
An emergency fund is there for unexpected financial setbacks. It’s not for kitchen upgrades, shiny new toys, or a desperately needed date with your spouse (although those are fun).
E-funds exist to protect you against traumatic, life-changing events. Some appropriate occasions for safety funds are:
Medical Emergencies
Job Loss
Major Car Repairs
Home Repairs
Unexpected Travel for Family Emergencies
Emergency Pet Care
Natural Disasters
Unexpected Legal Expenses
Such situations require immediate attention, often with significant financial consequences. Having an e-fund in place protects you from these disruptions and keeps you stable.
What does the Bible say about emergency funds?
Jesus was clear that life was full of challenges. This includes financial setbacks. We all know the verse:
“I have told you all this so that you may have peace in me. Here on earth you will have many trials and sorrows. But take heart, because I have overcome the world.” — John 16:33 NLT
God is honest enough to tell us that bummers will happen. But we can set ourselves up for success by squirreling away cash each month for future tragedies.
With regards to savings, God talks specifically about e-funds when Joseph stored grain during the prosperous years of Egypt. This enabled the Egyptians to weather the worst famine in the land that came much later. And what’s wonderful is this idea came straight from God:
There will come seven years of great plenty throughout all the land of Egypt, but after them there will arise seven years of famine, and all the plenty will be forgotten in the land of Egypt... … Let Pharaoh… take one-fifth of the produce of the land of Egypt during the seven plentiful years. And let them gather all the food of these good years that are coming and store up grain under the authority of Pharaoh for food in the cities, and let them keep it. That food shall be a reserve for the land against the seven years of famine that are to occur in the land of Egypt, so that the land may not perish through the famine.” — Genesis 41:29-30, 34-36 ESV
In these two examples, God made it clear that bad things happen. But we can take steps to protect ourselves and experience some measure of stability.
How to build an emergency fund
Most financial experts agree that an emergency fund of $1,000 is a good starting point. A Bankrate survey estimates that a staggering 56% of Americans can’t afford that amount in case of an emergency.
To set yourself up for success, save a decided amount of cash each pay period. Make sure it’s a healthy but doable amount so you can reach $1,000 in 10-12 months. Then, don’t touch it!
If you need some ideas on how to build an emergency fund, here are some thoughts:
Set a Savings Goal
Automate Your Savings
Cut Non-Essential Expenses
Sell Unused Items
Save Windfalls
Review and Adjust Your Budget
Set Up a Savings Challenge
These are just a few strategies. We can dive into more during our live discussions. Just know that countless strategies exist to help you build a buffer against financial hardship.
Join Me for a Live Session
We’ll talk more about strengthening our finances in today’s live meeting. Our focus is chapter two of my manual, Prosperous Soul Online: Advanced. If you don’t have a copy, you can find one here. My free handout is available here.
God bless your Prosperous Soul,
Stephen K. De Silva
About: Stephen K. De Silva is an author, speaker, and financial mentor. From 1995 until 2017, he served as the CFO of Bethel Church, and a member of the senior leadership team. Stephen’s blend of experience, training, and gifting make him a pioneer in the subject of money. You can reach Stephen at hello@prosperoussoul.com