Paying Off Debt or Holding Cash

This topic came up on a blog I really enjoy recently. Since I am having a rare chill day and hording posts it seems like something to write about. First I will tell you what I did and then we can have some discussion. Personally I stashed a pretty solid emergency fund (equivalent of around 4+ months expenses) before looking to make accelerated debt payments. I am not saying it is right for everyone but that is what I actually did. The other logical route would be going Dave Ramsey style ie stashing a small emergency fund of $1,000 (or a bit more or less say $500 if you make less than 20k a year or $2,000 if you make more than 80k) to catch small emergencies then attacking debt like crazy.

I think interest rates are a big factor. A moderate 5% student loan could get minimum payments while you horde some cash but AMEX or Visa at 18% would bury you. You would gain almost no ground making minimum payments. The next big factor would be the projected payoff date based upon what you could toss toward the debt every month. The longer the period of payoff the higher the chances of something happening where you would need more than $1,000. If you could be debt free in 4 months then maybe just go for that but if it will wake a year or two I would want more savings.

The thing is that (especially with unsecured debt) you can choose not to pay at any given time if things get real bad. Lets say I have been able to put away 5k over the last 6 months. Either I saved it towards an emergency fund or used to pay down debt which lets say averages 7% interest. BAM something bad happens; you lose your job, get put on half time, the transmission in the car goes out, you have medical expenses not covered by insurance or whatever. I would be inclined to say you are better off with the cash to put food on the table, gas in your car, keep the lights on and a roof over your head than a smaller balance or even lower debt payments. The thing is that you can keep food in your stomach's, fuel and energy going and a roof with cash while lower debts will not do that. Worst case you can put off (yeah it is bad but less so than starving or being homeless) paying back whomever till things improve but you can't take back that money to eat on.

I think that even if you exclude regional disasters and hyperinflation I am comfortable trading the security of having the means to independently afford to survive for awhile for paying a bit more interest.

One could split the difference. Save a little bit then pay off the credit cards. Save a bit more then attack the car loan, etc. That might be the most balanced idea. However I am paranoid and would rather hold the cash.

Thoughts?