When is it OK to use your emergency fund to pay down debt?

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For many people, getting out of debt as quickly as possible is an important priority — especially if you’ve borne the debt for several years and been crushed by high interest rates. So if you are so close To get 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.

Why paying off debt can feel so urgent

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Another benefit of paying off debt quickly is the ability to redirect your money to other destinations. Northwestern Mutual’s 2020 Planning and Progress Study found that 58% of respondents who have debt feel their balance has prevented them from meeting important financial milestones. Of these respondents, 36% delayed major purchases, 29% said they delayed saving for retirement, 18% delayed buying a home, 8% delayed having children, and 7% delayed getting married.

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

Should you be using your emergency fund to pay off debt?

The short answer is it depends on how much debt you have and how much money you have in your emergency fund.

Remember that your There is an emergency fund to cover unexpected expenses that would otherwise set you back financially and leave you in even more debt. So if you’ve had to use a significant chunk of your emergency fund to pay off debt, you can severely limit your ability to cover a large unexpected expense. Because of this, 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 remaining credit card balance of $5,000, paying off the debt would wipe out half your emergency fund — and that could leave you in a more vulnerable financial position if you don’t have other savings. However, if you have a $10,000 emergency fund and a $500 credit card balance to spare, you’re more likely to use some of your savings and still feel confident that you’ll be able to handle a big unexpected expense.

“If you pay that kind of [debts] leaves you vulnerable to a financial crisis that could potentially result in credit damage, personal bankruptcy, or temporary or permanent impoverishment, then the financial reward of interest savings for reducing debt may not be worth the risk,” explains JR Robinson, a personal finance expert at Credello.

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

Methods to pay off debt faster

There are many strategies you can use to get out of debt a little faster and make the process a little more manageable. If you have several debts with different interest rates, you can try Debt snowball method to help you make extra payments on the debt with the lowest balance first (while only making the minimum payments on your other debts). This allows you to pay back a balance much faster, which also motivates you to keep working on your other balances.

On the other hand, the debt avalanche method targets the debt with the highest interest rate first (while you make the minimum payments on your other debts). This is how you save the most interest.

You might also consider using a personal loan to consolidate multiple debts — especially if making payments on multiple balances is feeling a bit overwhelming. In debt consolidation, you apply for a certain amount that is enough to cover all your debts, and the lender sends each of your creditors a certain amount to pay off those debts. Then all you have to do is repay the personal loan in the form of fixed, equal monthly installments plus interest. Most personal lenders — like LightStream and SoFi — allow you to apply for a debt consolidation loan.

LightStream Personal Loan

  • Annual Percentage Rate (APR)

    2.49% to 19.99%* when you sign up for Autopay

  • loan purpose

    Debt Consolidation, Home Improvement, Auto Financing, Medical Expense, Wedding and others

  • loan amounts

  • conditions

  • credit required

  • incorporation fee

  • Penalty for Early Payout

  • late fee

SoFi Personal Loans

  • Annual Percentage Rate (APR)

    5.74% to 21.28% if you sign up for Autopay

  • loan purpose

    Debt consolidation/refinancing, home improvement, relocation assistance, or medical expenses

  • loan amounts

  • conditions

  • credit required

  • incorporation fee

  • Penalty for Early Payout

  • late fee

Another effective option can sometimes be to use a 0% APR balance transfer card when high interest rates are making it difficult to pay off your credit card debt. Let’s say you apply for a credit card like the Citi Simplicity® Card or the US Bank Visa® Platinum Card: you can transfer the balance from an existing credit card to a new card and cash out as much as possible with an introductory offer of 0% interest.

Citi Simplicity® card

  • reward

  • welcome bonus

  • annual fee

  • Introduction APR

    0% for 21 months on balance transfers; 0% for 12 months on purchases

  • Regular APR

    14.74% to 24.74% variable

  • transfer fee

    5% of each balance transfer; At least $5

  • foreign transaction fee

  • credit required

US Bank Visa® Platinum card

On the safe side of the US bank

  • reward

  • welcome bonus

  • annual fee

  • Introduction APR

    0% for the first 20 billing cycles on balance transfers and purchases*

  • Regular APR

    14.49% – 24.49% (variable)*

  • transfer fee

    Either 3% of the amount of each transfer or a minimum of $5, whichever is greater

  • foreign transaction fee

  • credit required

Finally, creating a budget can help you pay off your debt faster while benefiting your overall financial health.

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

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Editorial note: Any opinion, analysis, review, or recommendation expressed in this article is solely that of Select’s editors and has not been reviewed, approved, or otherwise endorsed by any third party.

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