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Money Q&A: Paying off debt vs. building up savings?

Q.

The Nest Q&A

Should paying off debt or building up savings take priority in this economy?

A.

In more “normal” times we'd say building your emergency fund up is priority number one. However, we’re in the midst of extraordinary times. Credit is very tight, so we’re shifting our advice slightly to encourage people to first build up a starter $2,000 emergency fund. After this, if you’re struggling with high-interest credit card debt, we'd recommend paying that down next. Why? Not only does paying off credit card debt guarantee returns on your money, but getting your debt-utilization ratio down (your total debt outstanding relative to your credit limits) can both help your credit score -- which, in turn, can lower the rates you’re paying on other debt -- and give you some wiggle room if you had to charge something new to your card. This is different from the advice we'd have given two or three years ago when it was much easier to get access to credit, and why we are now advocating paying down high-interest consumer debt before fully attacking your ideal goal of having a six-month-plus emergency fund.

Get Financially Naked, money Q&A Nestperts: Manisha Thakor, MBA, CFA & Sharon Kedar, MBA, CFA, authors of Get Financially Naked: How to Talk Money With Your Honey

-- Manisha Thakor, MBA, CFA & Sharon Kedar, MBA, CFA

See More: Credit , Credit Cards , Money , Money Q&A , Budgeting , Getting Out of Debt