Ashley Asks A Question: Should I pay off my car loan or build my emergency reserve?

aaaqcarloan Let me tell you something people. When you start getting debt paid off it's addicting. There's some sort of snowball effect or something. As you know, I paid my credit cards off in January. Now, I'm all like "DESTROY ALL THE DEBT!" There's one problem though, the savings hierarchy says now that my credit card debt is gone I should be building my emergency reserve.

Ok, now I'm lost. I clearly need to turn to Eddie, COO of Wela for this one. Let's get to it.

Related: Slideshare - The Savings Hierarchy: How to effectively prioritize your savings

The balance left on my car loan is low enough that I could probably pay it off in 6 months however, I don't have nearly enough in my emergency reserve. Which one should I prioritize?

Eddie Goepp, COO of Wela

This is a great question as a car loan can fall in the “gray area.” It’s not a "bad debt" like credit cards but on the other hand your car is not an appreciating asset. As long as your car loan is reasonable (i.e. you’re not financing a 2016 Porsche Cayenne on a salary of $45,000) then you should continue to pay down the loan according to the agreement and focus on building your emergency reserve savings.

The reasoning behind this is actually the purpose of the emergency fund. Let’s say you paid off the car loan but had no cash reserve and an emergency occurred. What do you do? This is often when credit card debt inevitably creeps back into the picture. The credit card debt you worked so hard to pay off.

Bottom line: Paying down debt is way more fulfilling than saving for an emergency but look, you gotta do what you gotta do.