It's smart to stash a little cash for unexpected expenses, such as a car repair or an ER visit. But if you're carrying debt, don't focus on socking away three to six months' worth of living expenses, as most financial planners recommend. For the time being, aim to build a modest emergency fund of $1,000.
Once you've reached that level, focus on paying off your credit-card debt and loans one at a time. Start with the smallest dollar amount, not the highest interest rate, since it's more empowering to eliminate a debt entirely than to see it decrease slowly, suggests Dave Ramsey, author of The Total Money Makeover. Once you've paid off everything, go back to building a bigger financial cushion for those unexpected expenses.
Bottom line: You need some money for a rainy day, but it's better to get out of debt as quickly as you can.