Question from a reader:
I am struggling with the priority of debt repayment. Currently, I have a debt of 100,000 yen with Company A at an annual interest rate of 13.5%, and a debt of 400,000 yen with Company B at an annual interest rate of 18%. Both my wife and I work, with my wife being a company employee and
I being self-employed, but I also want to save for an emergency fund. Should I start making extra repayments after saving a certain amount for the emergency fund, or should I prioritize repayment without saving for the emergency fund? I would appreciate your advice on how to think about this.

Balancing Debt Repayment and Emergency Fund

Hello! I am a man in my early 30s, born in California and raised in Osaka. I love comedy and am usually well-versed in the business of the entertainment industry, but today I want to talk from a slightly different perspective. Recently, I received a question from a reader regarding the “priority of debt repayment.” Specifically, the situation involves debts of 100,000 yen (13.5% annual interest) with Company A and 400,000 yen (18% annual interest) with Company B, while also needing to consider an emergency fund as a dual-income couple. So, let’s think together about what to do.

Organizing Your Debt Situation

First, let’s organize your debt situation. The debt with Company A is relatively small, but the annual interest rate is 13.5%. The debt with Company B is larger and has a higher annual interest rate of 18%. Here, it is important to calmly consider which debt should be repaid first and how to think about the emergency fund. Generally, it is wise to pay off high-interest debt first. This is because a high interest rate results in a larger total payment over the long term. Therefore, it would be better to prioritize repayment of the debt with Company B.

The Importance of an Emergency Fund

However, we must also consider the emergency fund. An emergency fund is savings set aside for unexpected expenses. For instance, it is ideal to secure three to six months’ worth of living expenses due to risks like illness or unemployment. As someone who is self-employed, I understand its importance well. There are times when income is unstable, so having a solid backup is necessary. In such situations, it is crucial to think about both debt repayment and the emergency fund.

Finding a Balance Between Debt Repayment and an Emergency Fund

So, how should you specifically find that balance? Here are my suggestions. 1. Secure the emergency fund first I recommend starting by saving even a small amount for the emergency fund. For example, aim to save 100,000 yen first. This will provide peace of mind in case something happens and reduce stress. 2. After securing the emergency fund, prioritize repayment of the debt with Company B Once you have a certain amount saved for the emergency fund, the next step is to prioritize repayment of the debt with Company B. Due to the high interest rate, early repayment is desirable. Additionally, if you have the capacity, you might consider gradually repaying the debt with Company A as well. 3. Review monthly income and expenses Since both you and your spouse are working, your income should be substantial. Review your monthly income and expenses to reduce unnecessary spending, gradually increasing your repayment funds. For instance, by cutting back on dining out or reevaluating hobby expenses, you might find you can save more than you expect.

A Real Case Study

Let me share a story about an acquaintance of mine. He had debts and was without an emergency fund, which led to unexpected medical expenses and further debt accumulation. From this experience, he realized the importance of an emergency fund and now has a solid backup of several months’ worth of expenses. Balancing debt repayment and an emergency fund has become his top priority.

The Importance of Having Peace of Mind

When thinking about debt and emergency funds, it can be mentally burdensome. However, having peace of mind is truly important. By gradually saving for an emergency fund, you can increase your sense of security and become more positive about repaying your debts. As a father, I also feel the importance of saving for my child’s future. I want my child to have a sense of security, and I also want to maintain my own mental well-being.

Conclusion

Ultimately, both debt repayment and an emergency fund are important. My suggestion is to save at least a little for the emergency fund before prioritizing repayment of the high-interest debt with Company B. Of course, the optimal solution may differ based on individual circumstances and perspectives, so please consider your lifestyle and risk tolerance when making decisions. Issues related to debt and money are often complicated, but let’s make progress little by little. I also want to build a solid future while laughing together, just like in comedy. Please take care not to overdo it and enjoy your daily life!