The Dirty D-Word
DEBT! Let’s talk about it.
A lot of people in the personal finance game (not naming names) preach that all debt is bad.
That’s definitely one way to look at it...but we think calculated debt—with a plan in place—can be a great way to build wealth for the long-term.
We get asked all the time: How do I prioritize contributing to my emergency fund and paying off debt?
Carrying debt can be just as heavy of anemotional burden as a financial one, and one thing that helps is having a plan in place.
Like everything we teach at Factora, there’s no hard and fast rule for debt. You’re completely in charge—so we want to empower you to make the most informed decision.
If you’re figuring out how to build in emergency fund while paying down debt, let us introduce you to:
The Factora debt quadrant
The Y-axis = how full your emergency fund is. The X-axis = how high your APR is.
We view emergency funds as #1 priority because emergencies happen and if you don’t have the funds available to cover them, it’s a slippery slope to piling on even more debt.
When it comes to debt, it’s not all about your total number (ex. “I have 40k in student loan debt”). It’s also about the cost of that debt; AKA the Annual Percentage Rate you’re paying on it. (ex. My student loans are at 9% vs. your car loan at 3%).
Debt with the highest APR should be paid off first since it’s accruing the most interest—therefore costing you the most! Credit card debt is usually the worst because it typically carries the highest interest—over 15%.
If you buy something for $100 on a credit card with a 20% APR and don’t pay it off in the next billing cycle, that item really cost you $120. Now imagine that same scenario, but with tens of thousands of dollars, and you can see why carrying credit cards balances STEALS from your opportunity to build wealth.
So here’s how your emergency fund (EF) and debt can work together:
If you have low-interest debt, like a mortgage at 4% and a car loan at 3%, go ahead and fill your EF to 100% while paying the minimums.
If you have high-interest debt, like a credit card at 20% with a balance on it, try and get your EF to at least 50% before aggressively paying off that debt. This will help you out if an unforeseen issue occurs and you’re forced to put even more money on a high-interest credit card.
If you have mostly high-interest debt but your EF is at least 50% funded, pay off the high-interest debt as aggressively as you can while getting your EF to 100%.
Remember: these are just suggestions. It always comes back to what you feel comfortable with and can manage. We know women who are comfortable paying the minimums on their student loans and we know women who feel like they can’t make another money move until they’re totally paid off.
When it comes to saving and paying off debt: you just need to prioritize it! The game plan is totally up to you. Consider your stress level, your emergency fund status, and your debt APR before creating your plan. Then get to it!
Keep Learning With Us
Get even more insights with our weekly podcast, Coffee & Coin, hosted by our Founder & CEO, Allegra Moet Brantly.
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