Guest Post: Debt Free Divas Answers the Question “Pay Debt Or Build Savings First?”

This is the classic chicken or the egg problem. Pay Debt or Build Savings? Which should one to do first? As we take on the No Buy Month challenge and reflect on spending habits – let’s consider this question. If you are in debt with limited (or no) savings, should you focus on building your savings or use the extra funds to pay off debt faster?

Let me tell you what I did.

I’m a huge fan of Dave Ramsey. In his book, Total Money Makeover, he suggests that before focusing aggressively on dumping debt, one should save $1000 to create a starter emergency fund.

My husband wasn’t comfy with the $1000 suggestion. Looking at our situation, we had a number of properties in addition to our home and a business that was barely staying afloat.

We settled on $1000/property to satisfy my husband’s concern and then focused on non-mortgage debt.

With the starter fund in an online bank without check or debit card access (online transfers take 3 days), we chipped away at the $107,000 in consumer debt.

It took 7 years.

In that time, we experienced a number of unexpected situations.

• Car troubles – I was sideswiped by a charter bus. Everyone was fine.
• Someone stole the copper wires, after cutting the main power source, to our business property. Twice!
• My daughter, Casey, was born at 23 weeks and after 2 hours passed from this life into Heaven. We had no reason to expect to fund a neonatal funeral as first time parents. As difficult as that experience was (and still is), the funeral home and cemetery required payment.

Without any savings, each of those expenses would have ended up on credit cards. With the small savings, the financial sting of dealing with the unexpected was muted. We were able to focus on the issue and not pile a financial concern on top of an already tense or heart-wrenching situation.

The small savings allowed us to manage the unfortunate experiences without interrupting the momentum we were building by addressing our financial mess.

I’ve learned this – craziness in life happens whether you are working to fix your finances or not. Building a small savings fund first allows you to begin attacking debt with vigor sooner. It’s a great way to achieve a quick win and generate the momentum you’ll need to stay focused on the entire goal. When (not if, but when) the unexpected happens, you’ll have a better chance of staying committed to your debt dumping goal.

Additionally, don’t despair if you’re forced to use your small savings to avoid additional debt in a financial emergency. That’s why you have the fund – for emergencies.

Once you’re consumer debt free – work on building a larger 3-6 month emergency fund. Without consumer debt, this process should be much easier.

Bio: Toni Husbands is a financial coach and co-founder of the Debt Free Divas. They help men and women struggling with finances become debt free. Visit them online @ www.debtfreedivas.org.

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