Why Building a Rainy Day Fund Is Preferable to Paying Down Debt Today

As individuals, we all have our own balance sheets we need to worry about. Like companies, having too much debt on our balance sheets can lower our debt rating, and cause liquidity concerns long-term if we don’t manage our debt loads well right now. With interest rates so low right now, many Canadians have been enticed by the lower interest payments to load up on debt. In this article, I’m going to describe the pros and cons of paying off low-interest debt right now.
For those who consolidated high-interest debt with lower-interest debt from home equity lines of credit, or similar instruments, such moves make sense. There’s no reason to pay 20% annual interest rates on credit card balances when one can trade this debt for a line of credit with a 2% or 3% annual interest rate. Managing one’s personal finances sometimes requires debt consolidation, and in this context, taking advantage of open credit lines with rates this low can make sense right now.
For those coming into some money via tax season or an annual bonus from one’s job, one may be choosing between paying down one’s debt load or investing in a rainy day fund. With interest rates so low right now, it may make sense to build up a rainy day fund first. Most personal finance experts suggest having a liquid fund with six to 12 months’ worth of one’s salary set aside in case of injury, job loss, or some other catastrophic event. This insurance policy of sorts is wise to have over the long-term.
Invest wisely, my friends.