Credit card debt increases every day that the debt is outstanding. Interest is calculated on a daily basis; so the longer you take to repay it the more it’s going to cost you. However, if you put all of your liquid cash toward debts, what happens if something comes up for which you need to make a major withdrawal?
Meanwhile, U.S. credit card debt has reached an all time high, as some 40 percent of Americans say they couldn’t cover an unexpected expense of $400.
So, is it better to have an emergency fund or pay off debt?
Sarah and I have a large emergency fund by almost any standards. If everything collapsed, we could live for more than a year simply on our cash reserves without touching any of our other investments. That’s a huge emergency fund.
So, why do we have such a big fund? Why not invest some of that money and have a smaller cash reserve?
The simple reason is that it leaves us feeling more secure. Knowing that if everything fell apart we have enough cash on hand to survive for more than a year makes us feel very little stress regarding our finances and our day to day life. If the stock market takes a dive or if something else like that happens, we’re still good to go.
This sounds appealing, of course, but it has a real cost.
As I’ve noted before, the average American family budgets for about $50,000 per year. We actually budget for quite a bit less than that, even with three children. For ease of calculation’s sake, let’s say our annual budget is $30,000 (it’s a nice, even number that’s pretty close to our actual number, which is an odd figure).