Emergency fund and debt before investing

Part 1

Start with $2,000, then build to 3 months

• 37% of adults couldn't cover a $400 surprise with cash in the Fed's 2025 survey [1]. Without a cushion, a car repair turns into credit card debt or a forced sale.
• $2,000 is the number that changes how people feel. Investors with at least $2,000 saved reported 21% higher financial well-being than those with none, in a Vanguard study of 12,443 people [2].
• 3 months, or 6 if it's riskier. Make it 6 if you're the only earner or your income varies. Nobody has derived 3 to 6 from data. It's a planning rule that has held up.

Part 2

Pay off anything above 7% before investing past the match

• Paying off debt is a guaranteed return at its rate. Stocks averaged 6.8% a year after inflation from 1928 to 2025 (Damodaran, NYU Stern). A credit card at 22% beats that every year, with no risk.
• Between 4% and 7%, it's your call. Splitting extra money between the two is fine.
• Below 4%, keep the minimum and invest. That's under what a high-yield savings account pays, which covers most older mortgages and many federal student loans.

Commercial bank rates, Q2 2026 [4].

Part 3

Keep it in high-yield savings, never in stocks

• A typical savings account pays 0.37%. The 3-month Treasury yield was 3.63% the same week, and high-yield accounts and money market funds pay close to it [3].
• On $10,000 that gap is $326 a year left at the bank.
• Cash is for emergencies only. It barely beats inflation over time, which is why everything past the cushion goes into the market.