Welcome to the money coach, a new Times of Malta column where readers can ask questions about life's money issues.  Send your questions about personal finances, inheritance, gifting or other personal finance topics to moneycoach@timesofmalta.com.

Dear Luca,

I am reaching out with a personal dilemma, hoping for some clarity.

Recently, I took out a €30,000 loan for a car. Originally, the plan was to repay this loan over five years. However, after doing the math and considering the interest, I'm inclined to pay it off in just two years. To me, it feels like a sound decision – less debt hanging over our heads and potentially less interest paid in the long run.

However, my family and I have no savings. Zero. My wife is particularly concerned about this. She fears that by focusing so aggressively on repaying our car loan, we're leaving ourselves vulnerable to any unexpected expenses that might arise. Without an emergency fund, we might find ourselves in a precarious situation if, say, a medical emergency or urgent home repair comes up.

I understand her concerns, and they're valid. At the same time, the thought of being debt-free sooner rather than later is highly appealing. Our family is divided on this matter, and I don’t want to make a decision that might jeopardize our financial health.

In your opinion, what would be the best course of action? Should we prioritise building an emergency fund first, or should we expedite the repayment of our car loan?

Eagerly awaiting your insights,

A concerned husband and father

Luca responds:

Life happens, and when it does, you have to be prepared for it.

It's true that you might save some interest by paying off your car loan in two years instead of five. But let’s touch upon the rate of interest on that car loan. If it’s exorbitantly high, then yes, there’s merit to paying off a more considerable amount, lest the interest suffocates your finances.

However, the utmost importance must always be placing funds towards an emergency, especially considering you currently have none.

But consider this: suppose you dedicate a majority of your savings to the car loan for the next year, and suddenly, an unexpected emergency arises. How will you pay for it? The bank won't simply hand back the money you've funnelled into your loan. An emergency with no financial safety net can derail even the most well-thought-out financial plans.

Your wife's concerns resonate with a financial principle that many overlook: the importance of having a rainy-day fund. An emergency fund acts as a financial cushion, shielding you from unforeseen events that can otherwise push you into further debt. The peace of mind that comes from having a safety net can't be understated.

Furthermore, it's crucial to ensure that this emergency fund is stowed away somewhere less accessible than your everyday current account. The aim is to make it challenging enough so that you don’t dip into it for non-essentials. And remember, a weekend getaway to relieve stress, while tempting, does not qualify as a genuine emergency.

That said, it doesn’t mean you have to choose one over the other. Balance is key. Perhaps you can manage to do a bit of both: continue paying your loan (perhaps more than the minimum, if possible) while also building an emergency fund, even if it's at a slower pace. This way, you're chipping away at your debt and also preparing for the unpredictable.

Given that you have no savings, I'd prioritise the emergency fund first. Ideally, you should have three to six months' worth of expenses saved up. Once you've amassed that safety net, you can then channel more funds into expediting your car loan repayment. This strikes a balance between preparing for the unexpected and achieving the peace of mind that comes with reduced debt.

While the allure of being debt-free is understandably strong, life's unpredictability demands that we maintain a buffer. Often, the biggest financial mistake isn't taking on debt, but rather being unprepared when life throws you a curveball.

Email Luca your financial questions at moneycoach@timesofmalta.com

Disclaimer: This column is intended to provide general information on various topics related to personal finance. The information provided is for educational purposes only and should not be construed as personalised financial advice for your specific situation. Financial decisions are highly individual and can vary greatly based on your unique circumstances, goals, and risk tolerance. The author of this column is not authorised to provide financial advice. Before making any financial decisions, it is recommended to seek professional financial advice from an authorised financial advisor.