Priority for being debt-free: emergency fund

Based on what I read and hear, the average Utahn is facing at least a little debt. And some are buried under a mountain of the stuff.

So the first thing to do is stop using our plastic and pay extra to our credit-card companies each month, right?

Well, maybe not, according to Mike Peterson, vice president of American Credit Foundation in Midvale.

Sure, it's important to get out of debt. But your first priority if you really want to be debt-free, Mike says, is to build up an emergency fund.

It may sound counter-intuitive, but hear him out.

Mike says few of the people with whom he works have a reserve fund.

"People just want to spend their money," he says. "They lack the willpower to put any money away.

"A lot of times people really don't realize that not having an emergency fund . . . causes them to pay more for their emergencies, because (they) just think, 'Hey, no big deal. I've got my credit card.' Unfortunately, what happens is a lot of people do that, and then they pay only the minimum (balance on their cards), and it takes them forever to pay it off."

Some people also think of their credit cards as an emergency fund, he says, but that isn't a good idea. For example, assume that instead of paying the $100 minimum on your credit card in one particular month, you paid $500. And then assume you lost your job or had to take a pay cut.

"All of a sudden, that $100 minimum is out of reach," Mike says. "The creditor doesn't care that you paid $500 last month. They want their $100 this month. . . . Put away an emergency fund first, because then, when and if an emergency takes place, you have money set aside to make that minimum payment on your credit card, or to pay for your car and home. You're in a much better position."

In a recent essay Mike wrote for his business, he says people don't like to think about unexpected expenses, but they do happen. Maybe your plumbing gets backed up or you have a fender bender or someone in the family gets sick.

"How will you pay for all that if you send all of your money to your creditors trying to pay off your debt? There would only be one way: Go further into debt," Mike wrote.