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Pay off Debt or Build an Emergency Fund


We tend to compile a bunch of to-do/bucket list in order for us not to forget the things that we need to accomplish. However, as the list grows, it becomes difficult to sort out the items of which we need to give high priority. This dilemma is not uncommon especially when planning our finances.
Pay off Debt or Build Emergency Fund
"no-money-poor-money-no-crisis" by 1820796 is licensed under CC0


What Should Be My Priority?

It is certain that most of the items in your list require some amount of money for it to be fulfilled. Be it travelling abroad, Buying your first car/home, or paying your debts. You need to revisit your list and properly categorize the items in their order of priority. Doing this will even eliminate some items that you deemed not important.

As discussed in my article "How to Start Building an Emergency Fund". It was stated that an emergency fund is the first step to financial freedom. So, if you are forging that path, having an emergency fund must be the first order of priority.


Why Should I First Build an Emergency Fund over the Debt Fund?

First, there are two kinds of debt, Good Debt and Bad Debt. As defined, Good Debt is borrowing money to finance your business or investments, that will eventually give you a Return On Investment (ROI). Bad Debt is borrowing money to finance mostly your wants and is not giving you any form of income.

Most income generating debts will take years to pay-off, so it is imperative to build an emergency fund first before tackling the long battle of debt paying. Liability debt on the other hand are not all for the short term. So, it is equally important to build first the emergency fund. The exception is if the debt can be paid within 6 months (which is the proposed month's worth for an emergency fund), then by all means pay the debt first. If not, you should focus on the emergency fund.

The bottom line is you should build first your emergency fund before paying your debts.


What If I Want to Do Both at the Same Time?

You would most likely think that you can multi-task. But in reality, you can only do 1 thing at a time. Even a computer, can only do 1 process at a time, it is just too fast that is why you see it as multi-tasking. Now that you are enlightened, the best course of action is to alternate the savings process.

For example, the first month's income will go to the emergency fund and the second month will go to the debt fund. Repeat the steps until you are done.


How Do I Start Funding My Emergency Fund?

  1. Take into heart the savings formula: Expenses = Income - Savings
  2. Allocate a certain percentage of your income for your emergency fund. Setting aside 10% is the ideal starting point. If you can't commit to it, then lower it to 5%. If you still can't, then you need to re-evaluate yourself.
  3. Be Patient, Consistent, and Faithful. Remember, Warren Buffet started investing at 11, became a millionaire at 30, and then a billionaire at 56.
  4. If you want to expedite the process, you need to learn how to sell. Be it selling yourself for a higher salary or doing a side hustle.
  5. Don't forget to evolve. Always study to learn something new that can help accomplish your goals.


The road to success is always hard but not impossible. As long as there is Patience, Consistency, and Faith it can be done.


"Develop your business first before building your house."
Proverbs 24:27



- The Affluent Perspective by Ælfræd "Elf Counsel"


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