I have a debt of $15,000 at a yearly interest rate of 9%, which can be paid within 5 years.

Would it be better for me to:

  1. Build first the emergency fund (e.g. liquidity for 6 months' expenses without income) and then start repaying faster my debt, or

  2. Would it be better to just have a "mini" emergency fund (limited shorter term liquidity for, e.g. 1/2/3 months' expenses without income), in order to be able to repay my debt faster?

6 Answers 6


If you aggressively pay off the debt, how would you handle the emergency?

When I talk to someone who is proud to build the 6 month buffer, but is still floating 18% credit card debt, I observe that they are worse off for the fact that they are earning close to zero in their emergency fund, while paying 18% on the debt. They'd be better off sending it all to the card, and for the short term, worst case, they rely on the cards as their emergency fund source. With no debt, they'll find it easy to save a true emergency fund over time.

In your case, is that 9% credit source something you can tap again? If not, do you have other resources? There's a lot to be said for liquidity, having access to funds one way or another, but you need to understand the cost.

On a personal note - When my mortgage was 7.625% and my liquid funds grew to a year's spending, we decided to take nearly all the money, refinance to 5.24% and at the same bank get a HELOC. This strategy isn't for everyone, but it worked, and the short term surprises were paid with a HELOC check and paid back quickly.

NOTE: This was a unique situation. I was not trading unsecured debt for secured, but simply paying down a mortgage with liquid funds. I traded a large cash cushion for a much lower debt burden, but at the same time, arranged for a HELOC. My first year interest savings was over $16K, far more than most people actually have as an emergency fund. This anecdote is offered only as a caution for the importance of liquidity.

With respect to Keith's answer - I'd advise against moving one's unsecured debt (credit cards) to a HELOC. This is most often a bad move. Unfortunately, in the US, the way a mortgage works is different from the offset loans common in Australia. Those offset loans allow an overpayment that one can tap if they need to. It was with this thought in mind I moved from a ~ $480K loan to a $384K loan at a lower rate along with a line of credit I could tap. Personal finance is just that, personal. This strategy isn't right for everyone. The decision wasn't made lightly; we looked at the what-if's and decided the benefits far outweighed the risks. We are still in odd times where some HELOCs are far below the 30 year fixed rate mortgages. My HELOC is 2.5%, my current 15 yr fixed, 3.5%, and the 30 is over 4%.

  • 5
    I would strongly recommend against the HELOC strategy for most people. Putting your home in hock to pay for surprises is a backwards strategy; in most states, particularly those with a "Homestead Act", a creditor can only take your home away from you if their debt is secured by your home. If a surprise debt occurs, like a medical bill, unemployment or even a lawsuit, by paying with a HELOC you willingly transfer the debt from an unsecured creditor to a secured one, encumbering your home. A lien is typically the last option for a creditor to get their money, and you've handed it to them.
    – KeithS
    Jan 22, 2014 at 19:31
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    By contrast, working out a repayment plan with any surprise creditors that doesn't involve your home as collateral is nearly always possible. Creditors don't want your home, certainly not in this economy with foreclosures selling for pennies on the dollar and your primary mortgage holder first in line to collect. Creditors, in seeking a lien on your home, also typically have to show they've made every good-faith effort to arrange repayment from you in an equitable means, before the judge will allow a lien to be attached against your wishes.
    – KeithS
    Jan 22, 2014 at 19:38
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    @KeithS - if you read my answer carefully, I was sitting on cash, too much cash, and traded a 7.6% mortgage for 5.25%. There are those who are so debt averse that they will forego a matched 401(k) to pay off a 4% mortgage. In my case, I decided that the choice to pay off a big chunk of my loan was actually risky, it would leave us with little cash. The HELOC strategy provided a cushion. The reality is that I got a new loan for $100K less, along with a HELOC that I never tapped beyond $20K. Strange to me that this approach would seem too risky. Better to sit on .1% cash? Apr 8, 2014 at 16:13
  • HELOC at 2.5%? I would take thay every day of the week. My bank charged something like PRIME+2.5% variable with a +4% lock rate, so a 30 year refi saved me 2% over the variable rate and that was with negative points.
    – user12515
    Mar 9, 2015 at 2:30

While I disagree with some of what Joe Taxpayer says in his answer, I will echo that you should carefully consider what you will do should an emergency arise while you are paying off the high interest debt, without an emergency fund to absorb such costs.

From a pure net-worth and ROI perspective, paying off high-interest unstructured debt is always preferable to building savings if you have both options, because by paying off the debt you are reducing the amount of money to your name that is effectively earning you a negative return. For an individual, an investment that will earn a matching rate of return to the interest rate on the debt will be an extremely risky one in most cases; the interest rate on your debt is a sure thing.

However, by using what would otherwise be a safety net in order to pay down debt, you risk having the real world come crashing down on you unexpectedly. If the amount of time it would take to pay off the debt were relatively short, say a few months, it might be an acceptable risk for you to focus solely on the debt, then allowing you to build up your savings later with the additional monthly income that had previously been tied up in interest payments. However, you imply that the extra money you're considering paying will allow the debt to be repaid in five years. That's a long time to expect nothing adverse to happen; you need a source of funds to handle an emergency, even if those funds come from the debt account you'd been trying to repay.

It isn't necessarily an either-or decision. A hybrid approach would be to take the money that you are deciding how to use, put half of it towards debt payments and the other half to savings (or any percentage division you choose), at least until you have a couple months' expenses. This doesn't pay down the debt as fast nor build savings as fast, but you do both, so from the very beginning you're making a dent in both needs.

Whatever you do, I disagree strenuously with JoeTaxpayer's anecdote of using a secured debt to pay off an unsecured one. Not if you have any other option. The reason is as I stated in my comment to his answer; most states offer homeowners considerable protection against creditors attempting to repossess your home, as long as you didn't agree to let them do so in the first place. Your mortgage lender, all other things being equal, is the only one who can foreclose on your home if you default on that debt, because they wouldn't have loaned you the money for the home without the assurance that they could do so. While the same thing can eventually happen with other debts, for an unsecured debtor it is the last option because it requires a lot of red tape and has very low chances of getting them paid in full. That's especially true in this economy, with home prices still depressed, homeowners underwater, and the mortgage lender first in line to collect on the foreclosure sale of your home. However, by transferring unstructured debt to a HELOC or other collateralized loan, you have given your debtors the power to take your home from you if you don't make good, when normally they have to fight tooth and nail against you to get that power from a judge.

  • +1 because your warning is proper. However. In my delightful anecdote, I paid a secured debt down to the tune of $100K, and over the past decade never tapped the HELOC for more than $20000. I was not transferring debt, but using cash earning .1% to reduce a mortgage charging 6%, at the same time dropping from a jumbo to a 4.25% conforming loan. This took my interest burdon from $27K to $14875/yr. A great return for that cash. We agree that for the OP, liquidity matters, even if my approach to it wasn't for everyone. Pre-anecdote, I suspect you approve of my answer. Jan 22, 2014 at 20:36
  • @JoeTaxpayer - I do. Your specific example is a good way to have a safety net while aggressively paying down debt. However, it could easily be misinterpreted by readers as recommending transferring the $15,000 of the OP's debt to a HELOC, which is what I warn against. It also could have gone very wrong for you if, Heaven forbid, you'd needed to put a $20k hospital stay on your HELOC.
    – KeithS
    Jan 22, 2014 at 20:49

With that high of an interest rate, I would say to only do an mini-emergency fund of 500-1000 dollars and then work on getting that paid off as quickly as possible.

Or, depending on what kind of debt it is, look at transferring it to something with a lower interest rate, if you can.

  • This would have worked out astoundingly badly for me. When my wife died suddenly, I had to come up with approximately $8000 in 24 hours and another $8000 within two weeks, for funeral and related expenses. I was very glad I had an emergency fund. Jan 22, 2014 at 20:05
  • @ChrisInEdmonton, While that scenario is a particularly awful one, the OP currently has NO emergency fund, and $15k debt at a high interest rate. An uphill climb is ahead either way. Maybe there are no dependents involved and there are other credit lines available. Jan 22, 2014 at 21:14
  • This is a very good point. Jan 22, 2014 at 21:23
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    @ChrisInEdmonton - and that is why people buy life insurace. But emergencies do come up that take more than $1000. But most emergencies are handled for less than $2000-3000, and many for less than $1000. May 5, 2015 at 0:02
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    @ChuckCottrill, in my very, very simple case, life insurance took four months to pay out. Life insurance is not a substitute for an emergency fund, though it will replenish the emergency fund in a situation like mine. May 9, 2015 at 15:01

The question appears simple,

Should I prioritize paying down my higher interest debt over building an emergency fund, or vice-versa?

And the details provided are minimal,

I have a debt of $15,000 at a yearly interest rate of 9%, which can be paid within 5 years.

No further information is provided regarding income and expenses, assets and liabilities, nor goals and obstacles. So let us consider the size of the debt questioned. The $15,000 debt at 9%, repaid over 5 years (used car loan?), would have a payment of about $311.40/month or $3737/year.

The question is phrased as an either/or, and seeks a general guideline, independent of situation. As debt is expensive, the purely analytical answer would be, "Pay off the debt, as quickly as possible".

But five (5) years is a long time. What sorts of problems could happen over that period which could derail the repayment plan? Illness, an accident, car repairs, etc. there are many unexpected events that could happen, and even more unscheduled and yet likely events could derail the five year repayment. Unless the OP budgets some funds for handling those expenses, then they are going to have several (at least 2-3 or more) events that will derail them from their debt repayment plan.

That is why the psychology of a minor ($1000) emergency fund helps. Rather than paying off $2000 debt, then having an unplanned setback push the debt back up $1000, using the emergency fund avoids the debt backslide to a higher amount. The debtor makes progress that continues. Even when the unplanned event drains the emergency fund, they don't slide back further into debt. Does the debtor net worth change? No, but the amount of the debt doesn't spike higher, and they see the finish line approach steadily (even when they stop running and rest, i.e. replenish the emergency fund). So, unless you are a machine, you may find that the psychology of an emergency fund helps you make (slower), but steady progress paying down the debt.

To illustrate my point, my own situation has had a number of unscheduled events occur over the past few years,

  • tree fell on roof, $500
  • ticket, $300
  • tires, $800 (civic)
  • ER visit, $1100
  • Washer and dryer failed, $1400
  • tires, $700 (second car)
  • ad nauseum

Having a $1000 emergency fund helped through several of these "unplanned", "unscheduled" events, without falling further into debt. And when the washer and dryer failed, that required saving until I had the additional money to replace them. And when two events happened at once, the emergency fund was not enough, and the exasperation with backsliding on debt was all I needed to reinforce the value of the emergency fund.

Life. It is what happens while you are making other plans.

Reality. Things are going to happen. Have a plan to deal with the things.


This is an open ended question. It's like getting in the car, hopping on the freeway with a full tank of gas and two hours into the drive trying to decide where you want to go.

Before you can decide on the best course of action, paying off your debt or building your savings, you need to decide on what your end goal is. Otherwise you could be driving in the wrong direction for hours.

If your goal is to build your credit rating then I would drive your savings up and pay a comfortable rate on your credit card. I say comfortable because only suckers pay the minimum on credit cards. Double or triple the minimum is usually a good bet. Don't let those bastards bleed you dry with interest.

However, if your goal is to buy a house or something large in the next year that you will need credit for, I would pay off your credit card first. It's always easier to get credit when you show a low debt to income ratio. I have bought homes with next to nothing in the bank before only because my credit score was high and my debt to income ration was great.

So in summary, decide where your going, then drive your bus there. Don't put the address in the GPS two hours into the trip. <enter other cliches here/>


This depends on your personal risk profile.

Financially, the right move is to pay down the debt. But life isn't always numbers.

If you have a huge savings account, a big, high interest debt payment isn't so scary....

source: I've had huge, high interest debt in the past

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