Once you have a \$500 emergency fund, you should:

• A. Use the \$500 to make a large discretionary purchase.
• B. Increase your emergency fund to \$10,000 before addressing any debts.
• C. Begin paying off any outstanding debt using the debt snowball method.
• D. Invest the entire \$500 in the stock market.

Answer: (C)

Verified step by step guidance

1. Understand the concept of an emergency fund: An emergency fund is a financial safety net designed to cover unexpected expenses, such as medical bills or urgent repairs, without resorting to debt.
2. Learn about the debt snowball method: This method involves listing all debts from smallest to largest balance, making minimum payments on all debts except the smallest, and using any extra funds to pay off the smallest debt first. Once the smallest debt is paid off, move to the next smallest debt.
3. Evaluate the \$500 emergency fund: If you already have a \$500 emergency fund, it serves as a basic safety net. The next step is to focus on reducing outstanding debts to improve financial stability.
4. Prioritize debt repayment: Begin paying off debts using the debt snowball method. This approach helps build momentum and motivation as smaller debts are eliminated quickly.
5. Avoid risky financial decisions: Do not use the \$500 for discretionary purchases or invest it in the stock market without addressing debts first, as these actions could jeopardize financial security.