Aug 12

What’s More Important: Paying Off Debt or Having an Emergency Fund?

There are two pieces of advice almost every financial pro will likely agree on. The first is to make it a priority to pay off debt, ASAP. The second is to build up an emergency fund of at least six months. Sound financial advice. But how do you do that when your emergency fund is currently $0 and your debt is … not at zero? Here, how to pay down your debt and make sure that you’ve got savings left over for when those inevitable emergencies occur.


What is the “emergency” in an emergency savings fund, anyway? 

Before you start saving for an emergency, it’s essential to have a really clear understanding of what an emergency is. You probably know a great travel deal isn’t an emergency, but what about travel when it’s heading to a close friend’s wedding? What about an apartment upgrade so you can live solo and not listen to a roommate’s 10 pm band practice? For the point of budgeting, a financial emergency is one in which not spending the money could potentially result in the loss of life or livelihood. Here, what may constitute a financial emergency:


  • Losing a job and needing cash to pay bills while you look for another gig
  • Health insurance, doctor bills, dentist bills and vet bills that need paying
  • Minimum payments on student loans and credit cards that would otherwise become delinquent
  • Car repairs 
  • Tax bills 
  • House repairs


You’re likely to have at least one “financial emergency” a year 

While “emergency” sounds dire, when it comes to finances, emergencies do pop up throughout the year. Maybe you get sick unexpectedly and need to take a (very pricey) trip to the ER, or perhaps the car you expected to last you at least a few more years suddenly dies on you. When these things happen, knowing you can cover the bill with cash that’s already in your account lets you deal without using a credit card, which would only restart or worsen a cycle of debt. That’s why it’s vital to build an emergency fund at the same time as you’re paying down debt. Here, how to do both at the same time.


Set your autopay to more than the minimum

If you’re paying down debt, it’s key to make sure that you’re paying more than the minimum on your cards — even if it’s just by $25 or $50. That way, you’re chipping away at the balance on your card, instead of just covering the interest with each monthly payment. Set your bills to pay $25 over the minimum and do the math to see where this leaves your budget. 

Focus on building one week of emergency expenses at a time 

If three or six months seems like an absurdly high amount for where you are right now, then it may be a good idea to focus on getting one week of emergency expenses in a bank account. 

Give yourself a month to accomplish this goal, looking at your budget to see where you might be able to trim expenses or add a side hustle. 


Have a plan

Come up with a plan for how you can save more money each month. Start with the obvious: Pack lunch, use coupons, DIY low-key date nights. But then think of other options: Can you start a side hustle? Are there any streaming services you no longer use? Can you sell clothes, or rent out your parking spot? Any funds that come from these actions can be used for building your emergency fund or paying off debt.


Consider a balance transfer or personal loan

One way to simultaneously pay down your debt while you build up your savings is by being strategic about interest rates. If you have a credit card balance with a high-interest rate, it may be worth looking into balance transfer offers or looking for a personal loan that has a more competitive interest rate than the ones you’re currently paying. That way, you know that the majority of the money you’re paying toward your debt is going to the balance on the card.


Assess your situation

For some people, a 50/50 split of money going toward your emergency fund and money going to your debt may make the most sense. But there is no one-size-fits-all approach. If you’re in a precarious job situation, it may make sense to save more in your emergency fund and wait to focus on your debt until you’ve got three months of savings in the bank. Just remember: Emergencies will happen, and having the funds on hand will make them that much easier to handle. 


Celebrate your wins 

Paying off debt and padding your emergency funds are two big deals. Consider non-financial ways to celebrate paying down a card or saving up one month of emergency fund money. Maybe it’s making a favorite meal, inviting friends over, or just reminding yourself how awesome you are. Focusing on what you’ve accomplished — instead of fixating on the debt you still need to pay or the savings you’d like to have — can help you stay on track.