Build an Emergency Fund, Pay Off Debt, or Save for Retirement? Three Competing Goals That All Need Your Attention Today

Build an Emergency Fund, Pay Off Debt, or Save for Retirement? Three Competing Goals That All Need Your Attention Today

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Should You Save for Retirement or Build Up Savings? And What About Debt?

What does building up an emergency fund, paying off debt, and saving for retirement all have in common? They all need to be done, and sooner rather than later. The problem is that for many people, all three of these issues are competing for the same resources. Your money only goes so far, so you need to prioritize.

So, how do you decide where to focus your efforts? There is a lot of advice out there and no simple answer. Some people suggest that you need to tackle that debt above all else. Savings and retirement be damned, but you need to pay off those credit cards. Others say you should really focus on building up an emergency fund first and foremost and tackle debt and/or retirement later once your emergency savings has been established. Everybody seems to have their own philosophy and can make good arguments for each.

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The Pros and Cons of the All or Nothing Approach

Depending on the advice you take, you’re probably going to be focusing most, if not all of your efforts on one particular area. Before you settle into a plan of attack, make sure you know the benefits and drawbacks of using this approach.


The good thing about focusing your efforts entirely on one area is you’ll see the greatest improvement in the shortest amount of time for that particular goal. If it’s paying down debt, obviously the faster you pay it down, the less interest you pay, and the sooner it’s paid off. The same thing goes for building an emergency fund or investing for retirement. The sooner you can put that money into action, the faster it can get to work.


With the obvious benefit, there are clearly some drawbacks. By focusing your efforts on one area, you’re subsequently neglecting other areas. If you’re putting all of your money into debt reduction, your emergency fund and retirement accounts will suffer. And what happens if you’re aggressively paying down debt but have an unexpected emergency? If you don’t have much of an emergency fund, it could in turn simply mean you’re going to rack up more debt. Or if you’re putting all of your efforts into building up that emergency fund because you’ve been told that is most important, it could backfire when your seemingly good credit card suddenly changes their terms and lower your limit or raise your interest rate.

Prioritizing Your Goals

If you’re like most people, you have to think about how you can work towards each of these goals at the same time. In tough economic times like these, the emergency fund is very important since a job loss could be right around the corner. Although, if you have debt to pay off it is obviously wise to knock that out — especially since many companies are changing terms and credit is harder to come by. And then you have to consider investing for retirement. Stocks have come off their recession lows and have been on a run that puts their returns above historical averages.

It isn’t easy when you’re faced with so many choices and limited resources. So, you have to prioritize. Your priorities will be unique, so the general advice you hear telling you what to do isn’t always going to be the best option for you. So, take a look at your situation and see which areas are most important.

For example, if you have virtually nothing in the bank in terms of savings, your emergency fund is probably going to be pretty high on the priority list. But if you have a month or two worth of expenses in the bank, even though it may not be up to your target level yet it could be less important depending on your debt and retirement situation. And don’t forget about interest rates and the type of debt you have. The type of debt you have along with the rate you’re paying can play a big role in determining how to prioritize those payments. Lastly, think about time frame. If you could eliminate your debt in just a few months by putting all your resources towards it, that’s one thing. But if it would take a few years, you have to weigh the opportunity cost, which is much greater in that situation.

Diversify Your Attack

When investing, you typically diversify. You will use index or mutual funds to diversify across stocks, maybe invest in some bonds or real estate, and so on. You do this because you’re trying to minimize risk. Without a crystal ball or relying on luck that’s about the best approach you can take. Well, deciding how to allocate your funds towards these different goals is no different. Without a crystal ball you don’t know what the stock market is going to do, or whether or not you’ll need to tap into your emergency fund, so you’ll want to diversify this money as well.

What happens if you neglect saving for retirement while you focus on your emergency fund or debt for 2 years when history shows us this was one of the best investment opportunities in decades? What if you aggressively invested for retirement only to lose more money while you’re still left with nagging debt and little or no savings? If you wouldn’t bet your entire portfolio on one stock, you probably shouldn’t bet your financial future on just one goal.

Go back to your priorities and use this as a basis for how to allocate your funds. Obviously, direct the bulk of the money towards the most important goal, but make sure you’re still putting something towards the other goals. Maybe this means you’ll only be saving $20 each week into your emergency fund for a while, or your retirement plan contributions are just 3% of your income, but make sure you’re doing something.

Why This Works

Focusing your efforts on multiple goals at a time does a couple of things. First, it puts in place a habit. Disregard the amounts for a moment and just consider the act of putting money towards all three of these goals. The idea here is to get into the habit of automating these processes so you end up not having to even think about it. So what if you’re retirement account is only growing by $50/month while you tackle more pressing issues, at least you’re doing something and it requires no additional effort on your part. It is much easier to slightly change something that’s already in place rather than start up from scratch down the road.

The second reason is that you’re hedging your bets. Without knowing exactly what the future holds, you just have to make sure you have all your bases covered. Hindsight is always 20/20. If you invested all your spare money into an emergency fund for 2 years while never needing it only to see the stock market take off and leave you in the dust, you might look back and think that was stupid. Or if you spend every penny trying to pay off some debt only to find yourself in an emergency without a dollar in the bank, you’re going to look back and think it wasn’t a good idea.

If you take some of the guesswork out of it and prioritize while still doing something to further your other goals, you won’t find yourself in as dire of a situation or be kicking yourself down the road because of a lost opportunity.

Assess Your Situation

Take a few minutes and look at your situation. See how you’re doing relative to your priorities. Keep in mind that priorities change, and while your plan may have been the ideal plan of attack a year ago, things may have changed to place importance on something else. And don’t forget about some of the benefits that may have changed over the past year or two. Maybe your job now does have a 401(k) match, or maybe your company eliminated it. Or perhaps your credit card company increased the interest rate. And let’s not forget the pitiful interest rates on savings accounts in the past year. All of these things can impact how you should allocate your money today.

Author: Jeremy Vohwinkle

My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.

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