Life factors determine whether to save or pay off debt

first child. I moved in with a friend at the end of last year to save money and pay down debt. My timeline to move out has changed due to my pregnancy. I’ve been saving to pay off a 401(k) loan. I’m debating if I should pay off the loan or keep the money in my savings account, just in case, due to my impending new arrival. I will be out of work for four months of paid leave. But I will have to make those bi-weekly payments for the loan while I am out on maternity leave.

A: Thank goodness for the paid leave. Even so, the birth of a child can bust your budget more than you expect. I wouldn’t deplete the savings to pay off the 401(k) loan. Just keep making the payments out of the income you’ll still receive while out on leave.

It’s hard to see money just sitting there in the bank barely earning any interest. But your emergency pot is there for a purpose. You always need a rainy-day fund because it always rains.

Asking if you should save or pay off debt is the wrong question. You should be asking: How much should I have in savings if I’m deep in debt?

To arrive at this figure, first consider your employment stability. Is your job secure?

If you aren’t sure your job is safe, you’ll need cash to help cover your expenses while you look for new employment. The debt matters, but a roof over your head and other life necessities become the priority. You may think you’ll find another job quickly, but what if that doesn’t happen?

Even if you’re confident of your job, put on hold any plans to save the recommended three to six months’ worth of living expenses. You should definitely aim for this goal eventually, but not now. Instead, just save enough to cover the typical emergencies that frequently come up, such as a significant car repair.

A comfortable emergency fund for most people is probably between $1,000 and $1,500. Once you reach this goal, stop saving and take any extra money you get to attack the debt.

If your situation changes — such as if you have an unplanned pregnancy or there’s a legitimate possibility of a layoff — slow down or put your aggressive debtreduction plan on hold.

It’s good that the reader wants her 401(k) loan paid off as quickly as possible, but the pregnancy creates a higher financial priority for now. She has to have some “just-in-case” money.