Debt Consolidation

Should I Build an Emergency Fund or Pay Off Debt?

Having enough money in the bank to see you through a financial emergency is crucial, but if you’re battling debt, earmarking your hard-earned cash for your savings account may feel counterintuitive. Not sure what to do? We tapped a few experts to answer the age-old question: Should I build my emergency fund or pay off debt?

What is an emergency fund?

An emergency fund is exactly what the name implies — a reserve of cash you can lean on when a financial disaster rears its ugly head. Having a locked-and-loaded savings account is your best protection against debt because it means you won’t have to rely on borrowing in order to cover unexpected expenses. But getting your fund rolling can be easier said than done.

Forty-four percent of U.S. adults don’t have enough in savings to cover a $400 pop-up expense, according to a 2016 Federal Reserve Board report. The kicker is that nearly a quarter of respondents had also faced a major out-of-pocket medical expense in the previous year.

To connect the dots here, you’re more likely to go into debt if you lack a stable emergency fund. And once you get caught up in debt, it becomes harder and harder to build your savings because more of your income is going toward minimum payments. Be that as it may, if you’re faced with job loss, an unexpected car repair or a surprise medical expense, do you have a financial safety net to catch you? If not, you may find yourself torn between two big financial goals: building your emergency fund or paying off debt.

“The key to breaking that cycle is getting people to realize both are possible,” certified financial planner Scott Snider told LendingTree. “It’s much better when someone can write a check from their rainy day fund whenever the storm hits, but the goal is to tackle both while prioritizing accordingly.”

Should I build an emergency fund or pay off debt?

Juggling multiple financial goals can be tricky, so much so that Snider calls it the ultimate battle.

“I try and help people realize that they can usually tackle both; they’re not always at odds with each other,” he said.

That said, there are some situations where it’s wiser to knock out debt before prioritizing your emergency fund, and vice versa.

When it makes sense to pay the debt before saving

When you’re at war with high-interest debt.

As we’ve highlighted, a healthy emergency fund really is your best defense against sliding into a debt cycle. But if you’ve already got some debt to your name, building that safety net may not seem as pressing as digging yourself out of the hole. This is especially true for high-interest debt, which essentially charges you for carrying a balance. Let’s look at it from a numbers-and-sense perspective.

Let’s say that after all your bills are paid each month, you have $300 left over. You have a savings account with a 1.50% APY, but also a credit card balance that’s charging you 20% interest. Snider argues that putting the extra money toward the debt is financially smarter since keeping that balance around will ultimately cost you more over the long haul.

When you’re struggling to make your debt payments.

Another time to focus on debt over saving is if your credit score is in jeopardy (i.e. you have delinquent accounts in collections or you’ve fallen behind on making your debt payments). Your credit score is more than just a three-digit number — it indicates to lenders just how creditworthy you are.

Missing or making late payments speak volumes because it pulls your score down, which tells lenders that you don’t know how to use credit wisely. When it comes time to apply for any type of new financing, whether it be a mortgage, an auto loan or anything in between, you’ll end up shelling out more, thanks to higher rates. The worst case scenario is being declined for a new line of credit altogether.

Go for a dual approach

According to Thomas Nitzsche, a spokesperson for Money Management International, a nonprofit credit counseling agency, the ideal approach is to fill both buckets — the emergency fund and the debt — simultaneously.

“If you’re really that stretched and you’ve examined your budget but are still coming up short, it might be time to start talking to your creditors to see how they can help you out,” he told LendingTree.

Nitzsche adds that they may be willing to reduce your interest rate or minimum payment, especially if you’ve experienced some kind of financial hardship. A credit counseling agency can negotiate on your behalf and enroll you in a debt management program that consolidates your debt so that you’re responsible for just one monthly payment to your counselor.

When it makes more sense to save before paying a debt

When you have no – or low-interest debt.

Don’t get us wrong: Carrying debt isn’t ideal. But some debt really is worse than others. (We’re looking at you, high-interest credit cards.) If you have no emergency fund to speak of, some experts say that should take priority over low-interest balances. According to Snider, any debt that’s carrying double-digit interest rates should be prioritized and attacked aggressively.

“Debts at low-interest rates, less than 4%, are where it gets a little dicier and the trade-off should be more balanced,” he said.

Another way to say it: Put more of your discretionary income toward building your emergency fund if your debt rates are so low that paying them down a little slower won’t really make matters worse in the long run.

When your savings account is empty.

Remember the debt cycle we talked about earlier? If you don’t have a cash reserve on hand, how will you cover your next unexpected expense or a stint of unemployment? Charging a $500 car repair will cost you more in the long term than pulling $500 out of your savings account to pay the bill. Being debt-free and having a solid emergency fund go hand in hand.

“If you have absolutely no emergency fund in place, start by putting aside just a few dollars a week, even if it’s just $10. If that’s what you’ve got, that’s where you start,” said Certified Financial Planner Angie Furubotten-LaRosee.

“You have to build the habit, but when people start seeing that balance grow, they feel a sense of achievement and success, like ‘I can really do this.'”

What to do when saving seems impossible

We tend to view financial goals through an all-or-nothing lens. For example, first I’ll pay off all my debt, then I’ll build up my emergency fund (or vice versa), then I’ll start saving for retirement … on and on it goes. The truth of the matter is that you can work toward more than one goal at a time. Even if you’re tackling high-interest debt, Snider still suggests kicking something into your savings each month, even if it’s only $50.

If you feel pulled in different directions, Furubotten-LaRosee recommends setting your sights on building a micro-emergency fund of $1,000 to $2,000 to build momentum. This means directing extra income toward your savings account until you hit that number, then shifting your focus to paying off debt once you’ve built that cushion.

“$1,000 is pretty significant; it’s got some meat to it, and that’s going to really help in a lot of situations,” she said. “That’s the target I’d shoot for if you have consumer debt.”

The idea is to dial up your contributions to your emergency fund after you cross the debt finish line. It’s all about balancing multiple goals at once while continuing to flex your saving muscles.

Either way, you’ll likely get there faster by accelerating your debt payoff timeline. This is where debt consolidation comes in. Personal loans are a great option if you can snag an interest rate that’s lower than what you have on your current open accounts.

Once approved, you use the loan to pay off all your balances, then begin making one monthly payment at a lower rate. Just be sure to shop around for your best rate. LendingTree lets you compare different offers by using soft credit pulls, which won’t impact your credit score. Speaking of, those with a lower credit score may only be eligible for a high-interest personal loan, which defeats the purpose of debt consolidation. Aside from the convenience of only making one monthly payment, it won’t actually save you any money or get you out of debt faster.

Balance transfers are another debt consolidation option that’s ideal for those suffocating under high-interest rates. If you qualify for a 0% promo APR balance, you can use this new card to pay off all your other balances. The one catch, of course, is that it only makes sense if you can wipe out the total before the promotional period ends.(They typically range anywhere from 12 to 21 months.)

One other thing: balance transfers come with a fee, usually in the 0% to 4% range, so be sure to take all this into consideration before pulling the trigger. But if the math works out in your favor, it can be a financial game changer.

Learn more: How do I build an emergency fund?

Here’s how to free up cash to boost your emergency fund, along with some tips for where to keep the money.

Start by budgeting

Building a fully loaded emergency fund doesn’t happen overnight. Begin by taking stock of your finances and figuring out how much you have left over to put toward saving or debt after your essential expenses are covered. In other words, you need a budget.

“Step one is taking your financial temperature, but most folks who come to us have never done a personal budget before,” said Nitzsche.

“When you really sit down and look at what’s coming in and where you’re actually spending your money, you’ll likely find some holes.”

In other words, establishing a realistic budget is key because wasteful spending can be redirected to your emergency fund. This means taking a hard look at your income, your fixed bills and your discretionary spending, which is where tracking your expenses comes in. Once you settle on a monthly contribution to your savings account that you’re comfortable making, treat it like any other bill. Setting up automatic monthly transfers is another easy way to get in the habit of paying yourself first.

Set a reasonable savings goal

The rule of thumb is to save up three to six months’ worth of expenses in your emergency fund, which would provide a pretty solid cushion should disaster strike.

“I lean toward the lower end if the client has a stable job with steady income, and the higher end for jobs with fluctuating incomes, like commission sales,” added Snider.

If your monthly expenses come in at $3,000, then a three-month emergency fund is equivalent to $9,000. The idea of saving up that much cash can be intimidating, but building a micro-emergency fund of just $1,000 is a powerful starting point that can make a huge difference in your financial health. (We’ll dive into the details shortly.)

Where to keep your emergency fund

Now that we’ve covered the basics of the almighty emergency fund, let’s talk about where to actually keep it. While our grandparents may have opted for stashing it under the mattress, doing so today would mean missing out on money — parking it in an interest-bearing account means you get paid as your money grows. Here are some options:

A high-yield savings account.

Most experts agree that this is your best option, especially since there are some great online accounts available. You can easily find higher rates by choosing an online-only bank versus a traditional brick-and-mortar bank. And the rate really matters. It means your emergency fund will earn you even more money as it sits there doing nothing. What’s more, transferring money out of an online account typically takes a few days, which can majorly rein in impulse spending.

If you’re worried about waiting a while for immediate access to cash, find a savings account that comes with a linked debit card you can use at an ATM, or use a free money transfer tool like Zelle to transfer cash between bank accounts when you need it.

To resist the urge to tap your emergency fund, Furubotten-LaRosee recommends keeping it separate from your regular bank.

“Try and put that money into an account you don’t have a checkbook on or a debit card for,” she told LendingTree.

“You may even want to consider putting it in a bank that you have to drive 15 or 20 minutes to get to; make it really hard for yourself to access that money.”


A certificate of deposit (CD) is an insured account that has a locked-in interest rate that’s generally higher than a savings account. The only thing is that in order to reap that benefit, you usually have to put in a minimum deposit and leave your money alone for a specified amount of time (typically one to five years).

Just keep in mind that most CDs come with hefty early-withdrawal penalties. In the face of a financial emergency, the last thing you want is to get hit with another expense just to access your own money. This is why it’s probably wise to take a portion of your emergency fund, not the whole thing, and let it grow in a CD.

Roth IRA.

IRAs usually bring retirement to mind, but this type of tax-friendly account pulls double duty, serving as an offbeat savings account of sorts. With a Roth IRA, you can grow your money and take it out whenever you want tax-free. The main catch is that you have to wait until you’re 59½ to touch the appreciation (a.k.a. investment returns) as you could get hit with taxes and a 10% penalty for tapping it early. Translation: Whatever you put in is yours for the taking; it’s pulling out any extra earnings that can be tricky.

Roth IRAs do have income and contribution restrictions, however. According to the IRS, if you’re under 50, you can contribute up to $5,500 in 2018 so long as you earn less than $120,000. That earnings number goes up to $188,999 if you’re a married couple that files their taxes jointly. While dipping into your retirement account isn’t ideal, it could save the day if you encounter a real financial emergency and have no other savings on hand.

Some final thoughts

A strong emergency fund is a critical part of financial health because it’s your best protection against debt. If saving three to six months’ worth of expenses feels too steep, set a target of creating a mini-emergency cushion of $1,000, stored in some sort of high-yield account. Those who feel weighed down by debt can consider consolidating their balances via a personal loan or balance transfer.

In an ideal situation, you can work toward both goals — debt repayment and saving — at the same time, although some scenarios warrant prioritizing one over the other.

“This situation of two conflicting, concurrent financial goals, reducing debt and saving, never actually goes away,” said Furubotten-LaRosee. “That’s pretty much how it will always be in our financial lives.”

Saving for a home versus paying off student debt. Building your retirement nest egg versus paying down your auto loans. It’s always a tug of war. The remedy? Prioritize your goals then fold them into your household budget. The most important thing is to get in the habit of saving.


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