What Comes First - Debt, Emergency Funds, or Retirement?

What is the most important priority for your money? Should you save for retirement, eliminate debt, or save for emergencies? Should you attempt to do all three? This is a question that I get frequently through the Ask Bob question and answer section on Prudent Money.

In looking at a person’s financial situation, my initial concern is always the strength of their financial foundation. There are two pillars that hold up that foundation and neither of them have anything to do with invested money. First, is there any debt? And if so, is the debt on a schedule to be paid off quickly. Second, does the person have adequate emergency savings readily available, as well as a plan for that emergency account?

If you run into a problem with debt or you have an emergency, it will not matter if you have money locked up for retirement. You have to be able to take care of the here and now.

So here is the strategy that I would recommend across the board:

1) Put a schedule together to determine how you are going to get out of debt. Make that your number one priority before investing in retirement or anything else. The only exception to that rule would be if there is a 401k match available. You don’t want to not accept free money from your company. This is where you really need to determine what is the most important. Getting out of debt is paramount.
2) Start thinking of a way to handle emergencies. What is going to be your game plan if an emergency were to occur? Now if you follow this formula of liquidating debt at all costs, what are you going to do about emergencies? Now this is where it gets tricky. If you are paying off a credit card where you can borrow the money back if needed, then you aggressively pay off the credit card. If you are paying off a credit card and there is no way of borrowing any of that money back in the event of an emergency, then you need to also make building an emergency fund a priority alongside of getting out of debt.
3) Once your emergency fund is built and you are out of debt, it is time to start thinking about retirement.

Obviously, these rules of thumb will not apply to everyone. However, for most, this ends up being a prudent game plan. If you cannot take care of the present, the future doesn’t matter.