Wondering if you should get an Emergency Fund or Pay Off Debt First?

If you’re reading this, you are probably in the same place that SO many other people are in too. You’re stuck in debt, and you don’t have any money saved up. You are sick and tired of being in debt year after year, and you want to finally end the cycle and stop living paycheck to paycheck. But you’re also not quite sure where to start. For instance, should you build up an emergency fund before you start focusing on paying off your debt? Which should come first?

• Did you know about one-fourth of all Americans don’t have an emergency fund? That’s about 57 million people. (Or it’s a little less than the total populations of both Texas and California!)
• Additionally, 50% of Americans currently are living paycheck to paycheck. The Federal Reserve also indicates that we also hold over $1 trillon in credit card debt and $2.8 trillon in non-revolving loan debt to.

So, if you don’t have money saved and you have debt– you’re definitely not alone.

Read on to learn the critical reasons why and the steps you can take to begin your own personal debt reduction plan. You’ll learn how making this one change can cause a huge difference in your life, and help you feel less stressed and more at peace. You can make this the year your debt cycle ends!

So again, the question- emergency fund first or just pay off debt as fast as possible?

Having tried it both ways, I’m sharing what I’ve learned over the many years I’ve struggled with debt. I want to help you make the best decision for yourself and finally GET AHEAD, like I have finally been able to do!

Why? Because in some ways I feel like I owe it to all those who have helped me along this path. And to share what I’ve learned and to help you avoid the mistakes and pitfalls I made. 

It’s scary when you are balancing a small amount of income, deciding where to put any “extra” money. I know the feeling well, and I did make the wrong choice many times.

So don’t feel bad! You can change! You can do this!

Failing to Follow Through

I knew I absolutely wanted to do it the right way this time around, in getting out of debt. I share more about some of my previous attempts, in my first Debt Detox Project post.

If you haven’t read it yet, the quick version is: I have been trying to get out of debt for over 10 years, with little to no lasting success…

…UNTIL NOW!

I started doing the steps I’ll share with you today. And once I did, that’s when I actually started to see a real, noticeable change. And let me tell you, it feels SO awesome!

Seeing the “total debt” number go down more and more every month is seriously a miracle. I still have a ways to go until it’s done, but I’m more determined than ever.

The LAST TIME

I will succeed if it kills me! I will not give up!

(Not really actual death, sorry, I can be a little dramatic) But so far, seeing the early success with the steps I’ve taken have only spurred me on more. Because you may have heard, “You only fail when you quit.” I will not quit this time.

And that is why I’m sharing this with you too!  Two main reasons, both to keep myself accountable, and to help YOU see that if I can do it, then you can do it too!

Even if you’re a perpetual “debter” like I have been. I know it feels like your stuck down inside a deep hole and you just want to get out of it right? Well, these steps are like adding a new rung onto a ladder in the hole with with. And with each rung added, you get closer and closer to getting out!

My first Debt Detox post goes over the first two big changes to make, which are the big mindset change, and the very important change in spending habits. So this post focuses on the next two items to work on to get more “rungs on your ladder.”

You Need an Emergency Fund

Okay, I’ll just say it… you definitely need an emergency fund first!

Starting an emergency fund is really one of the most essential parts of the entire pay off your debt plan.

And I know that this might be another hard truth to accept and start. Especially if you are not used to saving at all. It was for me, and I’m still not done funding mine.

But, besides the fact that all the money experts everywhere, also recommend this, (and probably your grandfather) I’m telling you, the peace of mind that you will start to get from having even a little bit of “extra” money set aside, is absolutely invaluable.

As my own fund has slowly grown, my stress levels have equally decreased. Seriously, SO MUCH! Even my blood pressure.

It is just as important as stopping the “hemorrhage” of money going out of your wallet, by curbing your spending.

You’ve got to make sure that you’re also not continuing to go into more debt. Which is what will continue to happen if you don’t get some money set aside.

Does that make sense? If you don’t, it just defeats the whole plan!

The Beneficial “Spare Tire”

You need to have some money set aside to use for those unexpected expenses that everyone has pop up. Whether it’s for the dentist or doctor, or a car repair, or something for your children (or a random surprise tax bill from 2015- yuck)- if there’s one thing that I can almost guarantee you- unexpected expenses will pop-up!

And, if you don’t have anything set aside when those things come up, you’ll be that much more tempted to use credit cards, get quick payday loans, or do whatever you have to, to pay those bills. Right?

I understand, I’ve absolutely been there and done that, I hate to admit. (I’ll be writing more about why payday loans are terrible, coming soon!)

If it helps, think of your emergency fund as the same thing as the spare tire in your car. (Not the kind on your belly! Ha!) Almost everyone has one in their vehicle, right? You probably wouldn’t go on a trip without one!

It’s just necessary to have, because guess what? Flat tires happen just like unexpected bills pop up. 

You hope you won’t need to use your spare tire, but it’s there, and you feel better driving your car knowing that. It’s reassuring, and because of that, I bet you rarely if ever think to yourself when you’re driving around, “Oh no! What would happen if I got a flat tire?”

That’s just silly, right? But how often do we start thinking, “Oh no! What if I have to go to the doctor? How will I pay for it?” I thought about that ALL THE TIME!

And yet, that’s a much more likely scenario to happen than getting a flat tire, and yet, we are all less likely to have an emergency fund. We all have a spare tire for the thing that rarely happens, and nothing for the things that are incredibly likely to happen! 

Does that even make sense then? No, it does not!

Because when you don’t have money saved, you are just helping keep the cycle of debt going around and around. It’s like you’re on a merry-go-round instead of a road to somewhere.

It keeps you from ever getting ahead or on top of your finances. And gosh dang it, I’m sick of this merry-go-round! It’s time to step off and start going somewhere else!

SO- Just Start!

My recommendation to you is to just start saving a little every month. 

Even if it’s only $25 or $50 (or less), start putting a little money into a savings account, or an envelope each month. Just make it somewhere that it is not easily accessible!

In my case, I put it in an account where I can’t just spend it with a debit card or check. I’d have to go to the bank and get money out or transfer it to another account. I make it hard enough that if I’m going to the trouble to get it, it had better really be an emergency.

Now, I’m not saying that you have to put every tiny little bit of extra money that you have to that account. I know that you just might not be able to. But, if you can, even start small at first- try to get to at least $1,000 saved.

Your next goal would be to get to one month’s worth of expenses, and then to three, if you’re so inclined. But don’t let those bigger goals scare you!

Just start and keep at it, a little at a time! You can get there if you just start and consistently work on it. And if you have to use some for a true emergency, build it back up as soon as you can. Make it your first priority for 2019.

But, What about My Debt?

This was my next question when I started my debt plan- how can I justify starting an emergency fund if I’m still paying ridiculously high interest rates? Which I was, like 26% high! That was killing me! (Credit cards and interest rates will be discussed in another post soon too!)

Well, this is how, I found a way to think about it so that I still felt good about it too! I had to put into action my change in mindset again. Maybe it won’t help you, but maybe it will!

A more tangible example might be to look at your emergency fund as also your “last month’s rent” or your “security deposit.”

You obviously need to keep paying your debt. But, if you have been paying extra to your debt already, or if you are going to start paying extra, (from all the money you’re saving now that you’re not spending on “little luxuries!“)

I still suggest that you get your emergency fund squared away first. And then by all means, pay all the extra to the debt that you can!

The “True Balance” Example

Here’s what I mean about thinking of it being a deposit. I call this the “true balance” example. For an example, let’s say that you have $15,000 in debt, and you have created yourself a emergency fund with $1,000 in it.

So now, technically you only have $14,000 in debt, because you have an asset of $1000. Then if you don’t use it (except in appropriate emergencies), as you keep paying toward your debt, you will technically always be $1,000 less in debt, than your actual debt balance.

Or in other words, you subtract your savings amount from your debt, and that is your “True Balance.”

So back to the example, just like if you put a refundable deposit down on an apartment rental, for $1,000, equaling one month’s worth for rent. You know that money is still “there”, the landlord has it.

But technically it’s yours and you’re going to get all of that back once you move out and then you’ll have an “extra” $1,000 right? Because your normal budget already includes your rent for that month.

Or, you could tell the landlord to just use that deposit to actually pay your last month’s rent of $1,000, which means you won’t use the $1,000 you would normally pay toward your rent, the month you move out.

That “extra” money works in your favor either way! 

So, the goal is to not use the emergency fund now- keep that set aside until you get your total debt principal down, until at least the amount you still owe, is equal to the amount you have saved.

For example, if you happen to get your emergency fund up to $3,000 and you’ve paid off almost all your debt, and it is now down to $3,000 that you still owe- you have a choice.

Technically you are at zero right then!

You could pay the $3, 000 off that month with your emergency fund and be to zero right then.

OR, you could keep paying off the debt for a few more months, and then when you are done, instead of being at zero, like the first option- you’d already have a net worth of $3k AND be debt free!

I don’t know if that helps you, but it sure has helped me! It’s awesome really to see the numbers every month. And it’s super exciting to think that I will still have money saved when I make my last debt payment!

Concerned that this will cost you a little more right now in interest, by not paying more toward your debt? While you work on the emergency fund?

It’s not likely to, because even though you’re paying interest, by preparing now, you won’t need to spend anymore on your credit cards in emergencies. Because if that balance does go up, it WILL cost you more in interest.

And at least now, you’re paying less and less interest every month as your balance goes down. You definitely don’t want to increase the amount of interest that you’re paying.

The Emergency Fund give you a little more success to see every month too, and that will strengthen your resolve to keep going. Try it!

If any of that didn’t make sense to you or you have further questions, please feel free to ask in the comments below.

Find Ways to Make Extra Money 

So, we’ve established that you absolutely do need an emergency fund and why. Now, it’s time to look over your finances again and see where there might be more “extra” money that you can either put toward that fund, or toward your debt.

Or, you might want to think about starting a side hustle that can potentially earn you more money.

This may seem counter-intuitive if you have debt, because you may need to invest a little, like if you start a blog or something. But you know the saying, “You have to spend money to make money”?

Sometimes it’s true. And that’s the direction I decided to go, long before I had my emergency fund started.

But it’s also  why I started my Etsy shop and this blog! I want to get there sooner than later! Out of debt that is.

My Etsy shop is consistently bringing in “extra” money for me each month. And it all started just by encouraging and working on a hobby that I already loved and enjoyed doing.

So, can you think of things that you make or create that you could sell? If so, you should consider creating an online shop!

I’m currently working on my first e-book, which will be an in-depth, step-by-step guide to starting an Etsy business. I can’t wait to share that with you soon!

And again, this blog is pretty spankin’ new, so I’ll have to get back to you on how successful it hopefully becomes! *wink*

But, I am hopeful and I am not ever giving up, which means I fully intend on becoming successful with this too! If you want to learn more about starting a blog, read my article about that here.

I do have lots more suggestions on possible other side hustles, that really do help make you more money, but that post will be coming soon too!

Believe, me, I’ve tried a TON of the suggestions that other people make- and not all of them are awesome. I’ll help you see which ones are worth your time!

Conclusion

At the end of the day, IMHO, getting your emergency fund set up first, is by far the priority. Again, I can’t begin to tell you what how that one small change has done for my confidence, my stress level, and my outlook on life. And I want you to start feeling that way too!

It’s absolutely an amazing feeling to finally have some money saved. To know that you’re in a much more stable place than you’ve been in years. And that you are not going to go into more debt if something does come up, (which it will) and wreck months of hard work and sacrifice.

My challenge to you is to start your emergency fund today! Are you going to do it? Let me know in the comments below!

Also, I hope that if this article was interesting and helpful that you will “like” it, or share it, or pin it!

And lastly, I’d love for you to sign up for my newsletter that will alert you to get all the upcoming posts I mentioned in this article.

Disclaimer- please note that I am not a financial adviser and the information presented is for educational purposes only, based on my personal experiences. Always seek guidance from a licenced financial professional for decisions regarding your money. See my full Disclosure for further information.