The NFCC often receives readers questions asking us what they should do in their money situation. We pick some to share that others could be asking themselves and hope to help many in sharing these answers. If you have a question, please submit it on our Ask an Expert page here.
I have 15k in debt and 15k in cash. Should I pay it off or hold cash for a rainy day?
Sometimes it can be challenging to decide to pay debt or save for a rainy day, especially if you have debts and no emergency funds. But sometimes, it doesn’t have to be an “either-or” decision. You can do both to start working toward a more secure financial future.
The importance of having a rainy day fund
An emergency fund is meant to help you deal with unexpected expenses, such as a broken major appliance or losing your job. Having a cash safety net can help you deal with an emergency faster and often cheaper than if you don’t have any funds at all. In addition, you have some peace of mind knowing that you can deal with a problem before it can become a crisis. Many financial experts recommend saving between three to six months of your living expenses on an emergency fund. If you aren’t there yet, you can use a portion of your extra cash to get you started and then budget to save some money on a monthly basis, even if it is $50.
The importance of paying off your debt
High-interest debt can be costly in the long run due to interest and, depending on your financial situation, it can become quite challenging to pay off. So, it’s always a good idea to use some of your extra money toward paying off your debt before it gets out of hand. Being debt-free gives you peace of mind, improves your credit score, and makes you more financially solvent with extra cash at the of the month to save or invest.
Paying off debt and staying debt-free
You will need a strategy to help you pay your debt. If you have credit card debt, there are several ways you can go about it. One, it’s called the snowball method. With this tactic, you organize your debts from smallest to largest and start paying the debt with the smallest balance first while making the minimum payment on the other ones. After the first one is paid off, you roll over that extra payment to the next debt and so forth until you pay them all. The other method follows the same principle, except you arrange your debts by their interest rate and prioritize the debt with the highest interest rate first. This approach is called the avalanche method, and its biggest benefit is saving you money on interest.
If you pay your debt but don’t have a strategy to help you stay out of debt, you can end up right where you started. Start by understanding your financial habits and determine if you need to change some of your behaviors. Maybe you should only use your credit cards for expenses you can pay in full at the end of your billing cycle or maybe you should learn how to optimize your budget better. Whatever it is, there’s always something you can improve upon to help you make the most of your finances. Think about your choices and make your money count.