Alright guys, this question is top 5 of what I get asked on a regular basis.

I get where the confusion comes from.

We are all told to save $1,000 first and then pay off debt before building up your 6 month “Oh Shit Fund.”

It’s good advice. But it’s not very practical for some.

Many of my coaching clients have asked me this and I had to reevaluate the advice I was giving.

Here’s my 3 step process for helping someone decide if they should save first or pay off debt first.

The Gut Check

Always start by checking in with yourself. Most of us have a savings number in mind that we feel comfortable with. Most of the time it’s around the $5,000 or $10,000 mark, but check in with yourself to find out what that number is for you.

Then once you determine the amount you need in savings, ask yourself why it’s that amount. Many times we have a number in mind because it “sounds good,” but it may not actually be that practical.

If your number is $10,000, you are a single person living at your parent’s house- $10,000 is probably not necessary.

How long will it take you to save?

The next step is to figure out how long it will take you to save for your Oh Shit Fund. Again, we aren’t planning anything yet, we are just unbiasedly writing down details.

Use the number from your gut check.

Let’s say the number you need is $5,000 and the most you can put towards savings is $1,000. It would take you 5 months to get the full amount needed.

Write that down.

How long will it take you to pay off debt?

Next, figure out how long it will take you to pay off debt. I’m going to build on the previous hypothetical of having an extra $1,000 a month you can kick towards debt.

Let’s say you have a total debt amount of $80,000. At the rate of an extra $1,000 a month, it will take you 80 months to pay off debt (or 6.5 years). This is important! Write that number down.

Look at your life situation

This is where the personal part of personal finance comes into play. You’ve got to look at the numbers you’ve written down above, and your life situation to make the decision of should I save or pay off debt first?

If you have a family, you’ve got a few kids, you have a spouse, your cars are getting old, you own a home, etc. You’ve got a bit more on the line than someone who is going through college and living at home while working part time. (This isn’t a bad thing, but the college student doesn’t generally have as much on the line financially.)

Everyone’s situation is a bit different, but there are so many commonalities it’s not even funny. So we can group us into one of two categories:

Category 1: Low financial risk (not much on the line)
Category 2: High financial risk (a lot on the line)

I actually group myself in the low financial risk area. The biggest financial flop that can happen to me at this point is losing my job or having an emergency and losing my house. My income is used to support me and me alone. I don’t have the added pressure of having little mouths to feed.

The decision making process

Once you know the level of financial risk your life carries, we can bring this all together and put together a plan.

Here’s my general rule of thumb:

If you are in a high financial risk, it’s going to take you 5 months to save up $5,000 for an Oh Shit Fund and it’s going to take you 5-10 years to pay off debt- BUILD YOUR SAVINGS FIRST

If your debt is going to take you less than 2 years to pay off, you really don’t need a sizable Oh Shit Fund. A lot can happen in 2 years, but you’ll very likely be able to cover the expenses by slowing down your debt pay off process.

Think about it.

If you are banking on $1,000 to get you through shitty situations for 10 years, the likelihood of nothing bad and expensive happening to you is slim. Your car will break down, your fridge will need to be replaced, you’ll file your taxes and have to pay in, and this will all happen at the same time, because freakin’ life works that way.

If you only had $1,000 in the bank to cover all life’s shittiness, you will be in a bad situation. Most people turn to credit cards to help them get through the tough times because they didn’t have enough of a rainy day fund set aside.

At the end of the day, it’s your decision, it’s your life. But do everything you can to not get stuck in a bad place where you are forced to take out more debt and have no cash to cover emergencies.

*Note: I am FULLY aware that paying off debt is directly saving you money. However, that money isn’t directly going into your bank account every month. So while I agree that paying off debt should be a top priority, being able to stay afloat and take care of your financial life outside out of debt is an even bigger priority in my opinion.