There’s a lot of money advice out there — and sometimes it can be difficult to separate the noise from the facts.
When it comes to building an emergency fund, there’s one piece of advice to steer clear of, says Sallie Krawcheck, CEO and cofounder of Ellevest, a digital investment platform for women: Establish an emergency fund — even if you have credit card debt.
“Sure, there are some kinds of low-interest-rate debt that may make sense to leave outstanding (think mortgages or some kinds of student loans),” Krawcheck writes on Ellevest. “But not credit card debt. Never ever.”
Just do the maths, she advises:
Say you have $5,000 of credit card debt at an 18% interest rate. Say you happen upon $5,000 of money. If you take some of the advice out there, and split the use of that $5,000 (half to establish an emergency fund, half to pay down credit card debt), you still have $2,500 of credit card debt and $2,500 of money sitting in cash.
The $2,500 of credit card debt at an 18% interest rate costs you $450 a year. The emergency fund earns almost nothing in interest. So you’re out $450.
If you rewind and choose to pay down the entire $5,000 in debt upfront, you won’t have an emergency fund, but you can use that $450 in interest you would have paid to start one.
What happens if you have an emergency before you get the chance to build up a rainy day fund?
“If that happens, then and only then take on some credit card debt and use it for that emergency,” Krawcheck says. “And then pay it right back down when the dust settles.”
If you aren’t holding high-interest debt, it’s always smart to get to work on establishing an emergency fund of about six months of living expenses. It’s one of the most important steps you can take with your money and should only be put on hold if you have credit card debt .
For more bad money advice exposed — and a visual of just how costly it can be to prioritise your emergency fund over credit card debt — read the full article on Ellevest.