An FP Canada certificant is advising a client with high-interest credit card debt ($15,000 at 19.99%), a low-interest personal loan ($10,000 at 5.5%), and an existing emergency fund of $5,000, which is enough for 3 months of essential expenses. The client has an additional $300 surplus cash flow monthly. Which action aligns best with prudent financial planning principles, and why?

Question: An FP Canada certificant is advising a client with high-interest credit card debt ($15,000 at 19.99%), a low-interest personal loan ($10,000 at 5.5%), and an existing emergency fund of $5,000, which is enough for 3 months of essential expenses. The client has an additional $300 surplus cash flow monthly. Which action aligns best with prudent financial planning principles, and why?

Answer options:

• Continue building the emergency fund to 6 months before tackling debt, as per general guidelines. ✅ Use the $300 surplus to aggressively pay down the credit card debt, as it has the highest interest rate.
• Split the $300 surplus between emergency fund top-up and credit card debt repayment.
• Pay off the personal loan first to gain psychological momentum from eliminating a debt.

Correct answer: Use the $300 surplus to aggressively pay down the credit card debt, as it has the highest interest rate.

Explanation: With an adequate emergency fund (3 months being the minimum recommended by FP Canada), the priority should shift to addressing high-interest, non-deductible debt. The credit card debt at 19.99% is the most costly, and the $300 surplus should be used to pay it down as quickly as possible to minimize interest accrual.