Build an Emergency Fund Saving

How to Build an Emergency Fund While Paying Off Debt

Written by Rebecca Lake

When you’re focused on paying off high interest credit cards or getting rid of student loans, saving money may be the last thing on your mind. The downside of forgoing building your emergency fund as you tackle debt is that it leaves you wide open to financial trouble if an unexpected expense creeps up.

Finding a way to build your savings as you knock out those debt balances is a balancing act but it’s not impossible. Knowing what steps to take allows you to do both without falling short of either goal.

Set your emergency fund target

The first step in saving for emergencies is deciding how much money you need to get started. The financial pros suggest having anywhere from three to eight months’ worth of expenses saved, but your ideal number may be more or less than that. Once you’re set on how much you need to save, the next step is to figure out the time frame for saving it.

For example, let’s say your expenses come to $3,000 a month and you want to build a three-month emergency fund. Your goal is to save the whole $9,000 over the course of two years. That breaks down to $375 a month you’ll need to set aside to hit your mark. Now that you’ve got a solid number to work with, you can begin looking for ways to tweak your budget to accommodate saving while you’re still in debt payoff mode.

Make your debt less expensive

If you’re paying 10, 15 or even 20 percent on some of your debts, that’s going to significantly slow down your progress when it comes to clearing the balances. It can also affect how quickly you’re able to save if you’re having to pay extra on the debt to combat the high interest rates.

Knocking off some of the interest makes it easier to get rid of the debt so you can free up extra cash to save. There are a couple of different ways to reduce your rates, starting with a zero interest balance transfer. At a minimum, card issuers are required to extend zero interest offers for six months but some cards give you up to 18 months to pay it off before the regular rate kicks in. Just keep in mind you’ll have to pay anywhere from two to five percent to make the transfer.

Another option is to consolidate your credit cards or other debts into a home equity line of credit. This is a good alternative if you’ve got equity in your home and you’re not able to take advantage of a balance transfer. Rolling your debts onto a home equity line does mean you’ll pay interest but it’s usually at a much lower rate compared to a credit card and it may reduce your overall monthly payment. If you’re paying less on your debt, you can redirect the extra money to your savings temporarily until your emergency account is fully funded.

Use windfalls wisely

The average tax refund for 2015 was just over $3,000, which is a decent sum of money when you’re trying to increase your emergency fund or pay off debt. The longer you take to decide how you want to spend your refund, the more interest you’ll pay on the debt and the longer it takes to save. Splitting the difference is the easiest solution and it gets you a little closer to both goals.

The same goes if you get a raise at work. Instead of letting the extra money be absorbed into your budget, which is what inevitably happens when you suddenly find yourself getting a bigger paycheck, you can put it to work by halving it between your debt and savings. Even if it’s only a few dollars every pay period, it can make a significant difference in how quickly you make progress.

Think carefully before putting your retirement savings on hold

Saving for retirement is a must even when you’re in debt, but if you’re trying to simultaneously build an emergency fund, it’s tempting to push it to the back burner. If you’ve been faithfully saving money in your employer’s 401(k), temporarily halting your contributions may not seem like that big of a deal, but you have to know what you’re sacrificing before you pull the trigger.

For instance, let’s say you make $50,000 a year and you’re putting 10 percent of your pay into your employer’s plan. If you start saving at age 30, you’d have nearly $950,000 by age 65, assuming a 50 percent employer match and a 7 percent rate of return. That’s not too bad for what comes out to just over $400 a month in savings.

Now, assume that you stop making those contributions for 5 years and use that money to eliminate your credit cards and student loans while saving for emergencies. If you resume making the same contributions at age 35, your nest egg would be worth about $640,000 by the time you reach retirement age. That’s a $300,000 sacrifice you’re making to get out of debt faster and have a liquid cash cushion.

If you think halting your retirement contributions for the short term is the only way to do both, you really need to go back over your budget to see if there are any other expenses you can cut. If you’re already down to the bare bones, upping your income is the next step. Starting a side business, looking for freelance gigs or getting a part-time job can give you the bump you need to save and pay off debt without putting your retirement on the chopping block.

Start small with your emergency fund

When your debts are at an overwhelming level, looking for extra money in your budget to save may seem like an insurmountable task. If all you have to work with is $10 or $20 a week, you may think it’s not even worth it to try. But, you shouldn’t give up. Those small amounts will add up over time and it helps you to build the savings habit.

Once you’re able to cross another debt off the list, that’s more money you have to attack the next one and add to your savings at the same time. The key is to get the ball rolling, even if you’re just nickel and diming it at first. Seeing your debt balances go down and your savings balance increase can be all the motivation you need to keep going.

About the author

Rebecca Lake

Rebecca Lake is a personal finance writer and blogger specializing in topics related to mortgages, retirement and business credit. Her work has appeared in a variety of outlets around the web, including Smart Asset and Money Crashers. You can find her on Twitter at @seemomwrite or her website,

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