Debt Me Outta Here Series

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Should I pay off my credit card or build my emergency money?

Debt Me Outta Here Series

Struggling with debt? Get in touch with Way Forward. Way Forward is a free debt charity that advocates with creditors on behalf of people who are experiencing financial hardship. We help those who are in problem debt to get back on their feet. 

Should I pay off my credit card or build my emergency money?

Paying off your credit cards and building an emergency fund are both great ways to get on top of your finances.  

The question is: which one is the best to do right now? 🤔 Ultimately, finding a way to work on both at the same time is the optimal, so let’s explore how you can do this. 

To begin, let’s assume that you have money remaining in your account once all your bills are paid. Then, work out how much credit card do you have and what interest are you paying. Keep in mind that the larger the amount of the debt, the more you will be ultimately paying in interest. 

Ultimately, it makes sense to go for the psychological win. What is going to give you the motivation to keep going? If you set yourself a goal to have $2,000 in your emergency fund and you can do it in a couple of months, then aim for that and then start paying off your card debts. 💳

If you need motivation to pay off your credit cards, start with the smallest balance first and clear the account, then move on to the next one but make repayments that are equal or greater than what you’ve been paying to the account you’ve just closed.

On the other side of a psychological win is the logical answer but if you lack the motivation or the end is too far away you need the smaller goals to feel a sense of achievement. I guess the right answer to the question is which one do you think you can stick too for the longest? Only you can answer that. 

How much do I need for an emergency fund?

There is no easy answer when deciding how much you need for an emergency fund. The best place to start is calculate how much it costs to cover all your bills for 2 weeks and then add anything else you need on top of that.   

Start with a basic budget so you can see where your money is going. Work out the amount that remains after you have covered all your expenses, we’ll call this your discretionary fund (you choose where to direct these funds). The number one rule here is earn more than you spend. When you know how much you have left over after you’ve covered your bills (maybe it’s $50 per week) you then have a choice, do I put it in an emergency fund or onto the credit card? 

It might also help to reflect on whether you’re buying things that fit into a ‘discretionary’ category or those items or services you could live without for a short period of time, and whether this money could instead go into your emergency fund? This might turn $50 per week into $70 per week. This doesn’t need to last forever, but even that extra $20 per week over 3 months gives you an extra $240 by merely cutting down on spending.

What happens to debt in divorce and what happens if you took on your partner's debt? 👫

The first place to start is to get specialist legal advice. You may not want to rock the boat in the relationship but if there is debt in your name and you did not benefit from taking out a loan, then you need to clarify whether you should have to pay it back. Speak to a community legal centre or a financial counsellor to understand your rights first and then you can work out what you do from there. Information is key to then finding the best course of action.  

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