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Use Your Safety Net to Pay Off Debt?

Use Your Safety Net to Pay Off Debt?

So you're in debt. You want out. It seems black and white, right? If it were, the answers would be more easy. Unfortunately, says Walter Updegrave (one of our fave financial experts) the problem is how we look at the situation. If you're looking at it from a purely numbers standpoint, then it clearly seems to make more sense to pay a high interest credit card, upwards of 13% as a national average, using the savings that are only returning you about 2 or 3%.

However, Updegrave warns that it may not be in your best interest to look at the situation in such a narrow scope. Instead, he urges people to consider their situation more broadly. If you dip into your emergency fund and you're laid off, other unexpected bills arise or something else entirely comes up, what do you do? You now have to put your expenses on that high interest credit card and the cycle of debt is repeated.

Emergency funds are meant for job loss, unforseen life events and accidents. Instead of using those funds to pay off your debt (which we're guessing isn't an accident, unless you accidentally stepped in those Manolos on the way to that financial planning seminar you meant to go to), try making your budget a little tighter to squeeze out extra funds. If you're already tapped, continue on, saving just a little bit each paycheck. In the end, you'll be much better off living debt free and still having a cushion, just in case!

Our line might seem like tough love, but if the expert says it, we try to listen. How about you? Are you saving while you pay down debt? [CNN]

Posted: 5/27/08