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Hi Pete!

This has been quite the year will my health. I'm in the middle of settling a lawsuit from a car accident so those will all be taken care of at some point. My question is this...I got a double whammy and had to replace the furnace and AC in January. It's interest-free for 60 months and I received a $700 rebate. I also have medical bills from some other treatment. So, should I use the rebate to lower the 0% interest on AC/Furnace or pay off one of the medical bills in full?

Thanks!!!

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Dear Double-Whammied,

It does sound like you’ve had quite a year! I’m sorry about your car accident and I hope things are coming together for you.

My answer to your question on whether to use the $700 for a medical bill or to pay down the AC/Furnace is neither because I want you to save it. Let me explain why.

I’m going to assume that you don’t have an emergency fund because you have medical bills and you financed your AC/Furnace. These are just the type of expenses that can completely derail your financial life if you’re not prepared for them. Being prepared means having an emergency fund to cover these types of expenses without having to use credit.

It’s important to have a cushion to absorb expenses that aren’t in your regular budget because, without it, those expenses must be financed. Once you’ve financed you now have an additional expense in your budget that wasn’t planned so something will have to be reduced. If you’re already on a tight budget, this just makes the situation worse. It can be a recipe for disaster until the cycle can be stopped by having savings to cover unexpected expenses.

So, my recommendation is to use that $700 to start or add to your emergency savings. And then I would add a savings item to your budget to contribute monthly to that emergency fund until you have 3 months worth of expenses saved up. Here’s a really good article on emergency funds that I think will give you some motivation to start saving.

As far as the order to pay down debts, I recommend using the Momentum Method.

It gives you a great mental boost as you pay down your debt and each debt that’s paid off helps you build momentum to pay off the next debt.

To use the Momentum Method, list your debts from smallest to largest. Pay the minimum on each and if you have extra money, apply it to the smallest debt at the moment. Once that debt is paid off, add what you were paying to the next debt, and so on.

There’s one BIG caveat to my recommendations. If you can’t pay off the AC/Furnace by making minimum payments for 5 years, you’ll need to either use some of the $700 or bump it up in your debt pay down plan. I want to be sure you pay it off by the end of the special financing period so you won’t owe interest for the past 5 years (if that’s part of the original agreement).

Wishing you a much better year!