Should I Pay Off Debt With My Emergency Fund?

Any financial advisor will tell you that it’s important to have an emergency savings fund—but it’s equally important to pay off debt as soon as possible. This leads many people to wonder: should I pay off debt with my emergency fund?

While there’s no right or wrong answer for everyone, here are some instances when it might be a good idea to dig into your emergency savings to decrease your debt.

If Your Emergency Fund Is Overflowing

Experts recommend having enough money in your emergency fund to cover three to six months of living expenses. If your emergency fund can cover at least a year of expenses, it’s definitely worth considering if you can repurpose some of that money to pay down debt. This is especially true if you also have other accounts where you are saving for a vacation or home improvements. Even though it’s no fun to delay financial goals, being debt free is more important. Remember: your interest payments on debt will only continue to rise over time, hurting your future financial freedom.

If Your Debt Is High-Interest

If you are paying off any debt with a high interest rate. Usually, this type of debt is the result of credit card spending, rather than a mortgage or student loans. Check your interest payments to understand what kind of debt you’re dealing with. If it’s high-interest, calculate how much you would save by paying down your debt with either a lump sum payment or by increasing your monthly payments. Getting rid of even a little high-interest debt will save you money, so that could be reason enough to dip into your emergency savings fund.

If You Have a Good Credit Score

Have you checked your credit score recently? It may hold the key to deciding whether or not to use your emergency fund on debt. If your credit score today is higher than when you originally acquired the debt, you might be able to consolidate your debt using a debt consolidation loan with better interest rates

If You Can Predict Your Emergencies

By definition, an emergency is something you didn’t see coming; but at the same time, you should absolutely do some predictive thinking around possible emergencies. If your car breaks down, will you be unable to get to work? How’s your health insurance? Do you suspect roof repairs will be needed in the next couple of years? How many dependents and pets do you have? Put in some time to consider all of these questions, then see how your answers stack up against your emergency fund. If you’re single, ride public transportation and rent a home, it’s possible you don’t need as much money in your emergency savings—but if you have children, depend on a car and own your home, it might be better to maintain that emergency fund.

If Your Advisor Says It’s Smart

When making a tricky financial decision like whether or not to dip into your emergency savings in order to pay off debt, it’s always a good idea to seek advice from a professional. HUECU members can take advantage of free financial counselling from the experts at GreenPath Financial Wellness. They can help to more carefully evaluate your personal financial situation and guide you on what options are available.