Key takeaways
- Without savings, an unexpected bill often goes on a credit card and adds to your debt.
- Start with a small goal, such as $500 or the cost of your most common surprise expense.
- Keep making at least your minimum debt payments while you save.
- Automatic transfers, even small ones, make saving easier.
- Once you have a starter cushion, shift more money back to paying down debt.
When you’re paying off debt, putting money into savings can feel like a step backward. Why save at a low rate when your cards charge so much more? Because life keeps happening. A flat tire, a medical copay or a short paycheck can push you right back onto a credit card if there’s nothing set aside. A small emergency fund helps break that cycle.
Why save when you owe money?
Think of an emergency fund as protection for your debt plan. Without one, every surprise expense becomes new debt, often at a high interest rate, and progress stalls. With even a small cushion, you can handle the surprise and keep your payoff plan on track.
How much to save first
You don’t need months of expenses to start. The CFPB says the right amount depends on your situation, and suggests thinking about the unexpected expenses you’ve had in the past and what they cost. It also notes that even a small amount can provide some financial security.
A practical way to start:
- First goal: a small starter fund, such as $500, or the cost of your most common surprise expense, like a car repair or a copay.
- Next goal: a bit more, such as $1,000, enough for something like an insurance deductible.
After that, you can decide whether to keep building savings or put more toward debt. Many people aim for a few months of essential expenses over time, once high-interest debt is gone.
How to split money between savings and debt
A simple approach:
- Always pay at least the minimum on every debt, so you avoid late fees and credit damage.
- Build your starter fund with any extra money until you reach your first goal.
- Then switch most of your extra money to debt, using the debt avalanche or snowball, while adding a small amount to savings each month.
- If you use the fund, refill it before going back to extra debt payments.
For a fuller version of this order, see should you pay off debt or save first.
Ways to find money to save
- Start tiny. $5 or $10 a week adds up, and it builds the habit.
- Automate it. Set up an automatic transfer to savings on payday, so you don’t have to decide each time.
- Save windfalls. Put part of a tax refund, bonus or gift into savings.
- Trim one bill. Lower a phone plan or cancel an unused subscription, and send the difference to savings.
- Use the 20% bucket. If you follow the 50/30/20 budget, split the 20% between savings and debt.
Where to keep it
Keep your emergency fund somewhere safe and easy to reach, but not so easy that you spend it by accident:
- A separate savings account at a bank or credit union, ideally federally insured.
- Not in the same account you use for everyday spending.
- Not invested in anything that can lose value when you need it.
What counts as an emergency?
Decide this ahead of time. Emergencies are usually unexpected, necessary and urgent: a car repair you need to get to work, an urgent medical bill, a gap in pay. A sale, a vacation or a planned purchase doesn’t count. Having a rule makes it easier to say no.
When money is too tight to save
If you can’t cover your essentials and your minimum payments, saving may have to wait. Start with a bare-bones budget that protects your income, housing and utilities first. A nonprofit credit counselor through the NFCC can review your budget for free or a small fee and look at options like a debt management plan.
The bottom line
A small emergency fund is part of getting out of debt, not a distraction from it. Start with a small goal, automate whatever you can, and keep making your minimum payments. Each surprise you can pay with cash is one less charge on your cards.
Sources: CFPB: an essential guide to building an emergency fund · NFCC