Should I save money first or pay off debt?

I'm reading "Financial Feminist" by Tori Dunlap and might have a few entries on this really interesting book, but she said something that shocked me so I wanted to run the numbers. 

In her chapter on "The Financial Game Plan", she says our FIRST goal must be to have a 3-6 month emergency fund. "Even if you're hundreds of thousands of dollars in debt, do not move on to the next step until you have your emergency fund."

The scream I scramed! I've said before that I'm more of a percentage budgeter... and in this book, she does get to that, starting with the 50/30/20 needs/wants/savings budget as a starter. But my shock about the idea of having a 3-6 month emergency fund before high interest debt drove me straight to my spreadsheets.

Let's say you take home $60K a year, and for the last two years you've spent 110% more than what you make... earn $5000 a month, spend $5500, wracking up debt on a credit card with 20% interest. For simplicity's sake I'm going to use monthly compounded interest.

Earning: $5000/mo

Spending: $5500/mo

For: Two years

End result: $14,607 in debt

Monthly interest: $243 a month ($14,607 * 20%/12)

You wake up and read this book. You cut the hell out of your budget, stop overspending, and now have 20% of your income left over for savings and debt repayments. That's a big cut! You've gone from spending $5500 a month to only spending $4000 a month, go you! And you have $1000 a month to put towards savings OR debt repayment.

Scenario #1: Save first

Every month, you put $1000 into a 5% high yield savings account. Your goal? 3 months of emergency savings... which is lower, now that you spend $4000 a month, you're going to save up $12000. That debt? You just let it ride.

By the end of year 1 you have:

• Savings: $12,278
• Debt: $17,812 (it's gone up, because of the 20% interest)
• Monthly debt interest payments: $297

But at least NOW you can start paying down your debt! You throw the full $1000 at it every month, and then... 

• End of year 2: $12,907 savings, $8,556 debt

Your debt is cut in half. If you keep paying it down, you'll be debt-free about 10 months later - October, if we started all this on a January. Awesome! 

• Total interest paid on debt: $6,702
• Interest earned on savings: $1,455
• Time to meet goals: 34 months

Scenario #2: 5% savings, 15% debt repayment

But let's flip it a bit. What happens if you split your 20% savings/debt repayment budget into 5% savings, 15% debt repayment?

• Start with: 0 savings, $14,607 in debt
• Goal: $12000 savings, 0 debt
• Every month pay: $250 savings, $750 debt repayment
• End of year 1: $3,069 savings, $7,939 in debt
• End of year 2: $6,296 savings, 0 in debt

Your debt is paid off and you can put your whole $1000 towards savings. You'll have your three month emergency fund around June. By that time, the grand totals are:

• Total interest paid on debt: $3,200
• Interest earned on savings: $570
• Time to meet goals: 30 months

Conclusion: I still like the percents!

I will agree with the author that budgeting and percentages are extremely personal. An emergency savings fund for one person might not be the same as what another person would make it, for sure. The Money Guys say to save up to cover your deductibles first. Dave Ramsey says $1000... seems to be just a totally random number, but sure. I still really like 5%! You can set it up THIS MONTH and see how it goes, start hacking away at your debt, save THOUSANDS OF DOLLARS long term, and who's to say a $3000 savings account at the end of year 1 won't cover some emergencies? Okay sure, it won't cover "oh my gosh I've lost all income for months", but it could easily cover an unexpected vet bill, trip home for a funeral, or car repair, and aren't those more typical emergencies that we need to expect? If you just keep doing 5% towards your emergency fund forever, you don't have to freak out and worry about how quickly you can repay your fund after a withdrawal you're just in the habit of it. You know that life will be about 5% emergencies.

To each their own. I will admit, I've always had an emergency fund, but I've never had to DRAIN it for that big an emergency. I just grow it when I can, and don't feel too bad when I have to use it because something came up outside my budget. I track my spending in a spreadsheet and put notes about big, unexpected expenses, so at the end of the year I can look back and know about what emergencies cost me. The fund keeps growing anyway, because I've always put the same percent in there.

I'd love to hear how you settled on this, there's definitely more than one correct answer. I just really like percentages, better than arbitrary "months of expenses" goals that reach into the 10s of 1000s of dollars. It's a lot. It takes a long time. I'm not happy when I'm doing anything that takes YEARS. But if I'm meeting my percentage budget goals this month, I'm happy this month, and I don't worry as much about the broad scheme of things. Isn't that how we win in the end? One day, week, month at a time?

Make today count, that's my take.