When Is It Okay To Use Your Emergency Fund To Pay Off Debt?

For many people, getting out of debt as quickly as possible is a major priority — especially if you’ve carried the debt for several years and have been getting crushed by high interest charges. So if you’re this close to getting rid of your balance once and for all, you might be wondering if it’s a good idea to use savings from an emergency fund to pay off your debt for good.

Another draw when it comes to quickly paying off debt is being able to redirect your money toward other goals. Northwestern Mutual’s 2020 Planning & Progress Study found that 58% of respondents who carry debt feel that their balance has been preventing them from hitting major financial milestones. Of those respondents, 36% delayed making large purchases, 29% said they delayed saving for retirement, 18% delayed purchasing a home, 8% delayed having children and 7% delayed marriage.

So being able to finally achieve certain financial goals can be an important driver when it comes to aggressively paying off your debt. If you spend $500 per month for credit card or loan payments, you can redirect that $500 toward retirement savings, or a wedding, or a home purchase once you’re debt-free.

Keep in mind that your emergency fund exists to cover unexpected expenses that would otherwise set you back financially and put you deeper into debt. So if you had to use a significant chunk of your emergency fund to pay off debt, you may greatly reduce your ability to cover a big unexpected expense. This is why you need to consider how much debt you have left and how big your emergency fund is.

For example, if you have $10,000 in your emergency fund and a $5,000 credit card balance remaining, paying off the debt would wipe out half of your emergency fund — and this could put you in a more vulnerable financial position if you don’t have any other savings. But if you have a $10,000 emergency fund and a $500 credit card balance remaining, you may be more likely to use some of your savings and still feel confident in your ability to handle a large unexpected expense.

“If paying down these types of [debts] leaves you vulnerable to a financial crisis that could potentially result in harming your credit, filing for personal bankruptcy, or being temporarily or permanently impoverished, then the financial reward from the debt reduction interest savings may not be worth the risk,” explains J.R. Robinson, a Personal Finance Expert at Credello.

And if you do decide that it would be feasible for you to use some cash from your emergency savings to pay off your debt, don’t forget to take the steps to rebuild your emergency fund.

There are many strategies you can use to become debt-free a little quicker and to make the process feel a bit more manageable. If you have multiple debts with varying interest rates, you can try the debt snowball method to help you throw extra payments at the debt with the lowest balance first (while making just the minimum payments on your other debts). This lets you pay down one balance much quicker, which will also keep you motivated to keep working away at your other balances.

On the flip side, the debt avalanche method targets the debt with the highest interest rate first (while making the minimum payments on your other debts). This helps you save the most on interest charges.

You might also consider using a personal loan to consolidate multiple debts — especially if making payments toward several balances feels a bit overwhelming. With debt consolidation, you’ll apply for a specific amount that’s enough to cover the total of all your debts and the lender will send a specified amount to each of your creditors to pay off those debts. Then, you’ll only be responsible for paying back the personal loan in the form of fixed, equal monthly payments plus interest. Most personal loan lenders — like LightStream and SoFi — allow you to apply for a debt consolidation loan.

Another effective option can sometimes be using a 0% APR balance transfer card if high interest rates are making it feel difficult to pay off your credit card debt. So let’s say you apply for a credit card like the Citi Simplicity® Card or the U.S. Bank Visa® Platinum Card: you’ll be able to transfer the balance of an existing credit card to a new card and pay off as much as you can with an introductory 0% interest offer.

Lastly, creating a budget may help you pay down your debt faster all while being beneficial to your overall financial health.

“By tracking your money and changing spending habits, you can free up cash to pay off debt faster,” Robinson says. “Look for ways to spend less money and also make more money. Where can you cut corners? Can you cook more and order out less? What about a side gig or selling some items you own?”

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