Would You Rather Pay Off a Loan with Savings or Keep an Emergency Fund?

When it comes to financial planning, the question of whether to use savings to pay off a loan or keep an emergency fund can often leave people in a dilemma. In this article, we'll explore whether it is wiser to prioritize debt repayment or maintain an emergency fund, especially during uncertain times such as a global pandemic like COVID-19.

Debt Repayment: A Responsible Decision

Whether a loan is secured or unsecured, paying it off is a responsible financial decision. Putting money toward debt repayment helps alleviate financial stress and improves your overall credit score. However, the decision to pay off a loan shouldn't come at the expense of immediate survival needs. If you find yourself in a situation where you need funds for essential expenses like food, lodging, or transportation, using your savings for debt repayment could create a daunting financial strain.

The Importance of an Emergency Fund

An emergency fund serves as a financial buffer to handle unexpected expenses or disruptions in income. During times of financial uncertainty, such as the global pandemic causing income loss, the need for an emergency fund becomes even more critical. It is essential to have a suitable amount of emergency funds before paying off loans.

Striking a Balance: Prioritize Your Financial Goals

Let's consider a scenario where you have a loan and sufficient funds to pay it off in full. However, due to an unexpected financial setback—such as job loss during a pandemic—you may need to make a critical decision.

Scenario Analysis: Paying Off the Loan vs. Maintaining an Emergency Fund

In the case of illnesses like SARS-Cov-2 and subsequent lockdowns, many individuals faced sudden layoffs and financial hardships. For example, if Surya Someshwara suddenly found himself without a job due to the pandemic, he would need to rely on an emergency fund to cover his essential needs. Despite having sufficient funds to pay off his loan, he chose to wait before doing so, reserving funds for unexpected emergencies or needs.

Surya's Advice: A Step-by-Step Guide

Surya advises the following strategies for handling a financial situation with both a loan and an emergency fund:

Check Your Employment Situation: If you are still employed and not expecting to be laid off, it is advisable to maintain 3 to 6 months of an emergency fund. Preferably, aim to build 1 year’s worth of emergency funds. Ensure Adequate Spending Reserves: Before prioritizing debt repayment, make sure you have enough emergency funds to cover unexpected expenses. This helps avoid financial distress and ensures you can handle unforeseen circumstances. Timing and Prioritization: Once you regain steady income, focus on paying off the loan quickly. In the meantime, consider channeling any additional funds toward your emergency fund. Alternative Investment Strategies: Rather than relying on traditional savings, Surya suggests investing in digital assets, such as gold through platforms like Paytm Gold. This strategy allows you to benefit from returns while still maintaining liquidity.

Conclusion

Ultimately, the choice between paying off a loan with savings or maintaining an emergency fund depends on your current financial situation and future income stability. Prioritize maintaining an emergency fund, especially during uncertain times, but also remain diligent about paying off debts to improve your financial health. By following the advice of experts like Surya Someshwara, you can make informed decisions that protect your financial well-being in both the short and long term.