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Introduction
Balancing emergency funds and debt repayment can seem nearly impossible––like walking a tightrope suspended across a canyon and financial stability is on the other side! Just like you would have a safety net for a tightrope, you need a financial safety net to handle unexpected expenses like car repairs or medical bills. But paying off debt, whether it’s credit card balances or student loans, feels like a cage you can’t break out of, keeping you from being able to build an emergency fund.
It’s no wonder this financial tug-of-war can leave families feeling overwhelmed and unsure of where to focus their efforts. The goal of this article is to help you find that sweet spot—where you can work toward building an emergency fund while paying off debt and creating a plan that supports your family’s unique financial needs.
Finances are like everything else: it’s all about striking a balance between living for today and planning for tomorrow. Are you ready to explore how to make this happen?
What Happens Without an Emergency Fund?
In Answer to the question in the title of this section, if you don’t have an emergency fund for those unexpected expenses, it’s like being on the line of scrimmage across from a 300-pound linebacker––it’s going to hurt! And it doesn’t matter if there’s a flag on the play or not; you still got nailed! While you’re still in a daze, the temptation will be to turn to debt of some kind to get you through. While this might seem like the right thing to do, it’s like painkillers. It only feels better for a little while.
Without realizing it, you can become dependent on credit cards, personal loans, or even payday loans. Over time, this reliance on borrowing only deepens the financial hole with someone throwing dirt on top of you.
The numbers speak for themselves: According to a 2022 survey, nearly 60% of Americans don’t have $1,000 set aside for emergencies. This lack of savings means even a minor financial hiccup can cause significant financial stress, especially for families already managing tight budgets.
Having an emergency fund creates a vital buffer, shielding families from high-interest debt and providing peace of mind.
Here’s an article about having a financial safety net: Savings vs. Paying off Debt. It’s a great way to understand how savings can help you weather life’s storms.
Without a plan, families can fall into a cycle of living paycheck to paycheck. The key takeaway? An emergency fund isn’t just a luxury—it’s a lifeline that protects your family from financial freefall.
The Cost of Carrying Debt
Debt repayment is essential! I can’t say this often enough. The fly in the ointment is the compound interest! If there’s a balance at the end of the billing cycle, they add interest! And even though you made a payment, the balance got bigger!
The average credit card interest rate in the U.S. is around 20%, far outpacing what you might earn through a savings account or investment. This means holding onto debt can erode your financial stability faster than you realize.
If you have a $10,000 credit card balance with a 20% interest rate. If you only pay the minimum each month, it could take over 20 years to pay off the debt—while costing nearly double the original amount in interest. That’s a lot of money that could otherwise go toward improving family finances or building an emergency fund.
While paying off debt aggressively is important, it’s not always the only priority. You and your family need to weigh your interest rates against the risk of unexpected expenses and ensure you’re not sacrificing your financial safety for short-term gains.
High-interest debt is the enemy! It drains your finances and increases financial stress, making it almost impossible to focus on other priorities, such as saving for the future or achieving family goals. In the next section, I’ll discuss how to balance these competing demands and decide which path is best for your unique situation.
In my article “Showdown Between the Snowball and Avalanche Methods,” I discuss two of the top options for paying down debt and explain how to know which is best for your family.
Emergency Fund vs. Debt Repayment: Key Factors to Consider
I get it: Building an emergency fund while focusing on debt repayment feels like being told to be in two places at once! And there’s no one-size-fits-all answer. Every family’s financial situation is unique, and deciding on the right approach involves weighing several key factors.
Interest Rates Matter
If your debt has a high interest rate (like credit cards), prioritizing paying off debt might save your family more money in the long run. For example, a 20% interest rate on debt far outweighs the 3-4% return you might earn on savings. However, low-interest debt (such as student loans) might take a backseat to creating an emergency fund if your financial safety net is thin. You’ll hear me say this over and over––don’t look for cookie-cutter solutions. Look at your family’s “unique” situation and make a plan that’s best for you!
Income Stability
Income stability is amazing! It’s better than amazing! But I know from experience it doesn’t matter how stable your income is––you need an emergency fund! If you’re able, double down on the debt repayment. But make sure you have the emergency fund in place before you do! If your family’s income fluctuates or relies on gig work, prioritizing an emergency fund can help protect against unexpected income gaps. Bottom line: Have a safety net first!
Family Size and Needs
Larger families often face more frequent and unpredictable expenses, from surprise school costs to medical emergencies. Having an emergency fund is critical for these families to avoid additional debt when life happens. However, don’t ignore having an emergency fund no matter what your family situation is––even if you’re single––you need money set aside for the unexpected!
Personal Comfort with Risk
Some people are more comfortable with financial risk than others. If carrying debt causes significant financial stress, you might choose to place more emphasis on it first—even if the math suggests otherwise. Financial decisions aren’t just about numbers; they’re also about peace of mind.
A Balanced Approach
Many families find success by balancing both goals simultaneously. For example, setting aside a modest financial safety net (like $1,000) while putting the bulk of your efforts into budgeting for debt repayment can address both short-term needs and long-term priorities. There are many options when it comes to “how” you implement your family’s strategy. However, I can’t stress enough that you make sure you have an emergency fund!
Tools like savings calculators or debt repayment planners can help tailor this approach to your specific circumstances. For tips on balancing debt and savings effectively, check out this helpful guide from NerdWallet: Emergency Fund: What it is and Why it Matters.
By considering these factors, you can make an informed choice that suits your family’s needs without compromising financial stability. Next, we’ll explore practical strategies for tackling both goals head-on.
Strategies for Balancing Both Goals
Finding the right balance between building an emergency fund and paying off debt is key to achieving financial stability without overwhelming your budget. Here are practical strategies your family can use to tackle both priorities effectively.
Proportional Budgeting
You can choose to use a proportional budgeting method, which can help you split your resources wisely. For instance, you could allocate 70% of your available funds toward debt repayment and 30% toward an emergency fund until you’ve saved a starter cushion of $1,000. Once you have that safety net, you might flip the allocation to 30% for debt and 70% for savings. Adjust the ratios based on your family’s needs.
Automate Your Savings
Automating your savings is one of the easiest ways to ensure progress without extra effort. Set up recurring transfers to a dedicated emergency fund account each payday. Even small amounts, like $20 per paycheck, can add up over time. As I’ve already mentioned, we started ours with $25 a month; don’t let the small amount fool you into doing nothing. Doing nothing is the enemy!
Pair this with automatic payments on your debt to ensure consistent progress toward reducing balances while avoiding late fees. Many banking apps and financial tools can help streamline this process. For example, savings apps can make it easier to stay consistent while working toward both goals. Learn more about how these tools work in this guide from Forbes: Six Tips to Help Organize Your Family Finances.
Cut Costs to Free Up Funds
Look for ways to temporarily reduce expenses to fuel both goals. For example, consider meal planning to save on groceries (this also helps with time savings and healthy choices), cutting back on subscriptions, or negotiating lower utility rates. Every dollar saved can improve family finances. One of our daughters started making “iced coffee” for her husband and kids at home, allowing the money saved to go towards savings.
Use Windfalls Wisely
I know using your tax refunds for fun stuff is tempting, and maybe you even feel like you deserve it––and I’m sure you do. But tax refunds, bonuses, or other unexpected income can provide a big boost. Split these funds between your emergency fund and debt to make significant progress on both goals. Once you’ve achieved your goals, you can allocate any “windfalls” you get differently.
Leverage Financial Tools
If you’re anything like me, you want to know where you are. Am I making progress? If so, how much progress? There are tools that can simplify managing both priorities. These tools track savings and debt repayment simultaneously. For example, debt calculators can help you identify how much extra to pay each month to shorten your repayment timeline. At the same time, the savings trackers show your progress also, keeping you motivated. By integrating these tools into your routine, you’ll have a clear picture of your goals and know exactly where your money is going.
Focus on Progress, Not Perfection
Balancing these two priorities takes time, but it’s totally worth it! So, remember, it’s not only normal to adjust along the way you should anticipate the need to do so! I’m sure you already know the only thing that’s consistent is change––so expect to make changes to your plan along the way! The important thing is that you’re moving toward both reducing financial stress and creating a sustainable financial safety net for your family.
Next, we’ll look at step-by-step tips to start building an emergency fund so you can act today.
Establishing an Emergency Fund – Step-by-Step
I waited and made excuses for years before we started an emergency fund, but the time finally came when I had enough! It seemed impossible, but so were the unexpected “life happens” moments! Here’s how to get started:
Set a Realistic Goal
I’m going to start by saying save $500 or $1,000. This is your “starter fund” to cover minor emergencies. But here’s the reality––we started with $25 a month. That’s all we could afford. I know, $300 a year; big deal. I thought the same thing, but I did it anyway. Doing that actually saved us from having to either borrow money from a friend or get a payday loan for a new tire. We didn’t have any credit cards at that time––a completely different story! The rest of the story is that as we could, we added to the $25 a month, but that small amount helped us on more than one occasion.
Increase the amount or frequency as you can. The goal is to have 3–6 months’ worth of living expenses for a more robust financial safety net.
Open a Dedicated Account
Keep your emergency savings separate from your checking account to avoid dipping into it for non-emergencies. Look for a high-yield savings account to grow your fund faster while keeping it accessible. Keeping it accessible is one essential component. Another is to keep it separate from other accounts. Another critical and essential component is for you and your family to have rules, guidelines, or whatever you want to call them that are triggers or reasons why you access your emergency fund. Get a good, high-yield savings account and forget about it.
Automate Your Savings
Make it a regular expense and set up automatic transfers to your emergency fund. It’s not an actual expense, but treat it like one. Build in the flexibility to skip a payday if there’s an actual need, but then get right back to it!
You know what they say about real estate: Location, location, location! For your emergency fund, it’s consistency, consistency, consistency! Even if it’s just $10 or $20 per paycheck. This approach ensures your fund grows steadily without requiring you to think about it every month.
Cut Costs to Boost Savings
If and when necessary, make temporary budget adjustments. This can accelerate your progress. Reduce dining out, pause subscriptions, or find creative ways to lower expenses. To build momentum, redirect these savings straight to your emergency fund. It’s not forever, but trust me, you’ll be glad you made the sacrifice!
Use Windfalls Strategically
Unexpected money, like tax refunds, bonuses, or gifts, can be game-changers. Commit a portion—or even all—of these windfalls to your emergency fund to make rapid progress. Remember what I said about “windfalls” in the last section? Go back and read it again if needed!
Track Your Progress
I realize we’re all different, but seeing our savings grow was and still is motivating! If you read any of my other articles, you know I’m a huge proponent of celebrating small wins! To celebrate milestones, use a simple spreadsheet, app, or even a visual tracker like a thermometer chart. This can keep the whole family engaged in reaching your goals. However, don’t make the goals too big. If the goals are too big and take a long time to reach, you lose the effect of celebrating the small victories!
By taking these steps, your family can create a strong financial safety net to handle life’s surprises and have fun as you go. In the next section, I’ll share ways to approach debt repayment with the same level of focus and strategy.
Creating a Family-Friendly Financial Plan
I can’t overemphasize how important this is; there’s no one-size-fits-all! A financial plan that fits your family is the foundation for balancing family finances, tackling debt repayment, and building an emergency fund. Here’s how to create one that works for your entire family.
Start with a Family Meeting
Teaching your children financial literacy is more important than I can express––include the entire family! Gather everyone in your household, including kids if they’re old enough, to discuss financial goals. Explain why saving for emergencies and paying off debt are important. Involving the family builds accountability and encourages teamwork.
Set Clear Priorities
Identify your family’s most pressing financial goals. For example, should you attack credit card debt first while funding a modest financial safety net? Or would the opposite work better for you? Setting clear priorities ensures that your plan reflects your family’s unique needs.
Build a Budget That Includes Everyone
Create a family budget with categories for debt repayment and emergency savings. List fixed expenses (like rent and utilities) first, then allocate funds for groceries, transportation, and discretionary spending. Use a 50/30/20 rule or customize proportions based on your goals.
Include a Flexibility Buffer
When you can, because life is unpredictable, add a “miscellaneous” or “buffer” category to your budget. This will allow you to follow the guidelines you set up about when to access your emergency fund more easily. Having a category like this prevents minor surprises from derailing your family’s plan while keeping your goals intact.
Track Progress as a Family
Review your financial plan monthly (I like to check every payday, but do what works for you) to check how much progress you’re making on your goals. Celebrate milestones, like paying off a debt or hitting a savings target. Visual trackers or apps can make this process fun and interactive for everyone.
Reassess and Adjust Regularly
Family needs and income levels change over time, so revisit your financial plan every few months. Reallocate funds as needed to keep up with new priorities or unexpected challenges. I’ll repeat myself: this is not only normal and ok, it’s necessary!
By creating a plan that aligns with your family’s goals and values, you’ll reduce financial stress and stay focused on achieving both emergency fund savings and debt repayment.
If managing multiple debts feels overwhelming, you’re not alone. Consolidation and refinancing can simplify your payments and even save you money in the long run. Check out my article, Top Debt Consolidation and Refinancing Options for Families, for practical tips and options to streamline your finances and take control of your debt.
How Much to Save for an Emergency Fund
Determining how much to save for your emergency fund depends on your family’s size, lifestyle, and financial situation. While the general advice is to have 3–6 months’ worth of living expenses––which I highly recommend––tailoring your savings goal to your unique needs can make this task feel more achievable.
Start with a Starter Fund
For families just beginning, building an initial cushion of $500–$1,000 is a great first step. This amount can cover minor emergencies like car repairs or medical copays while you focus on other priorities like debt repayment. I’ve already talked about this; do what you can and increase as needed, but start!
Calculate Based on Living Expenses
To set a long-term savings goal, calculate your family’s monthly essentials, including:
- Rent or mortgage payments
- Utilities
- Groceries
- Transportation costs
- Insurance premiums
Multiply that total by three (for a smaller safety net) or six (for more robust protection). I recommend six months as your final goal. Break it down into smaller pieces, but don’t stop until you reach six months. You’ll reduce your financial stress during emergencies from the very start, and each time you hit the next milestone, you’ll feel even better!
Consider Your Family’s Lifestyle and Risks
Consider your specific circumstances. Do you have young kids with frequent medical needs? Is your job secure, or do you rely on seasonal income? Let your unique situation and dynamic guide your decisions, but start now. Don’t stop until you get to six months. You can take temporary breaks if needed, but reengage as soon as possible! Keep building your emergency fund.
Adjust for Life Changes
Revisit your emergency fund goal periodically, especially after major life events like the birth of a child, a job change, or a move. Your savings should grow alongside your family’s needs and expenses.
Break it Down into Smaller Goals
Saving several months’ worth of expenses can feel overwhelming, so break it into smaller milestones. For example:
- Milestone 1: Save $1,000
- Milestone 2: Save one month’s expenses
- Milestone 3: Save three months’ expenses
Focusing on smaller targets makes the goal more manageable and motivating.
Building an emergency fund tailored to your family’s needs ensures you’re prepared for life’s surprises without derailing other financial goals, like paying off debt. Up next, I’ll highlight the benefits of achieving both goals and the long-term impact on your financial stability.
Benefits of Achieving Both Goals
There’s no way I can adequately communicate the comfort and complete dissolving of financial stress that comes with knowing you’re prepared! The stress begins to lift almost immediately when you start building your emergency fund. And as it grows, it just melts away! Yes, you’ve got to crunch the numbers, but it is most definitely not only about the numbers! It’s about the financial stability and opportunities that come from planning!
Reduced Financial Stress
Having a financial safety net is huge, but it shouldn’t end there! Debt repayment is just as important. When you have a safety net and no debt, the emotional toll of money worries disappears. When, not if, life rocks the boat, you’ll have the confidence you need to weather the storm without reaching for your credit cards!
Increased Financial Resilience
My family has been blessed in many ways, and when I consider everything, life’s been good! But it hasn’t been without unwanted surprises. When the kids were little, we had a ton of medical expenses. Add to that the constant need to repair something or another on our very used vehicle. I was convinced there was no way we could have an emergency fund unless someone else funded it.
I can’t remember what finally snapped in me, but I do remember concluding that something had to be done! As I mentioned in this article, we started with $25 a month and very strict rules, which we decided together would be the reason for using any of that money. Yes, there were still tough times, but because we started it did get better and easier!
Freedom to Plan for the Future
Debt. It’s a pretty controversial topic! And there’s no way to cover it all in this article. But here’s what I know. I’ve lived with debt and without debt, and I can tell you, our life without debt is indescribably fantastic! And it’s not because we’re wealthy. It’s because we don’t have the financial worries and debt’s best friend, stress as house guests that just won’t leave! Added bonus: we’re able to save for things we want to do! Like a two-week trip to Disney World for our Fortieth anniversary! Don’t judge! We get to define what “Freedom” looks like for us––come and join us! Check out my article: How to Pay Off Debt on a Low Income.
Stronger Family Bonds
Speaking from the perspective and experience of having adult children raising their own families, one of the best things you can give your kids is to teach them financial literacy! Think about all of the different roads you’ve traveled. Some are as smooth as glass. Others are laden with potholes you could swim in. Some are treacherous during certain seasons, depending on where you live. They are narrow, wide, straight, curvy…you get the point. Life’s road is exactly like this. I’m going somewhere, I promise (pun intended).
Use this particular road to work on shared goals together. Build trust, strengthen bonds, have fun, and teach your children invaluable life lessons they will never forget! You’ll reach your financial goals, but the value of sharing life in this way goes well beyond dollars and cents.
Opportunities for Wealth Building
These two strategies go hand in hand. Yeah, they’re pretty good on their own, but together––it’s just something you have to experience for yourself to understand. Accomplished together, you’ll have the freedom to explore wealth-building strategies, like investing or starting a side business. Do this because it creates a positive financial cycle that supports your family’s future for generations.
By achieving both an emergency fund and becoming debt-free, your family gains not just financial freedom but also the ability to dream bigger and live more fully. The key is balancing your efforts in a way that works for your unique situation. With a little planning and persistence, you can create a foundation for lasting financial stability and peace of mind.
The content provided in this article is for informational purposes only and should not be considered financial, legal, or tax advice. Every family’s financial situation is unique, and it’s important to consult with a certified financial planner, accountant, or legal professional for advice tailored to your specific needs. The information here is based on research and sources believed to be accurate, but we do not guarantee its accuracy or completeness. Any actions taken based on this information are at your own risk. Always do your own research and consider your personal circumstances before making financial decisions.