Should you handle debt or build an emergency fund first?

By Whitney Nielsen Bankrate com There s a reason financial advisers keep recommending you save money for emergencies More than one in three Americans needed to tap their urgency savings in the past year according to Bankrate s Annual Urgency Savings Summary But when you re juggling debt putting money toward savings can feel overwhelming Multiple feel paying down their balances would be more beneficial than adding money to savings Related Articles Fishermen battling with changing oceans chart new module after Trump s push to deregulate New Arctic Cat leadership restores more than jobs in Thief River Falls St Cloud Trump floats cutting China tariffs to ahead of meeting as he looks to deescalate transaction war Wall Street drifts as it waits for a highly anticipated US-China meeting on bargain Founder of crypto platform Celsius Framework is sentenced to years in prison As a general guideline financial experts suggest building a small urgency fund first enough to cover one month of your expenses This will help you avoid sliding deeper into debt when surprises pop up Beyond that initial safety net focusing on paying off your debt or increasing your savings depend on your unique situation and goals factors to consider before paying down debt or building your savings Having a six month or more emergency fund and being debt free is obviously the idea However the greater part people need to prioritize increasing savings or paying down debt Choosing which one to prioritize depends on your unique circumstances Before you decide between paying down debt or building your savings consider these seven factors What is your current amount of savings Your first step should be to assess how much you at present have in savings Financial experts generally recommend that you have at least one month s worth of essential expenses in an easily accessible high-yield savings account HYSA This should cover essential expenses like your mortgage or rent payment groceries and transportation costs Without this buffer even minor surprise expenses can derail your finances and push you further into debt If you don t have one month s worth of savings this should be your immediate priority If you already have enough money in savings evaluate your debt and other financial priorities to determine where you should focus next You might have heard advice from friends or online that is sufficient as a starter exigency fund Given up-to-date inflation and tariffs potentially leading to rising living costs likely is not enough for the bulk Americans Aim for at least a full month s worth of your minimum living expenses This will give you a more reliable safety net that is tailored to your lifestyle and budget How much debt do you have The amount of debt you re carrying and how it compares to your income can significantly influence your financial soundness If your debt load is high or your debt-to-income DTI ratio exceeds reducing your debt is likely more urgent than expanding your crisis fund Keep in mind High debt levels not only cost you more over time through interest payments but they also limit your financial flexibility and increase your financial stress Bringing down your debt burden first can free up more money later to build substantial savings What is the average interest rate on your debts Another critical consideration is the interest rate on your debts If your debt consists primarily of high-interest accounts like credit cards averaging around a annual percentage rate APR you re effectively losing money every month you delay paying it down In these cases focusing aggressively on debt repayment will likely save you more money than you d gain from accruing interest in a savings account A high credit utilization ratio or the percentage of credit you re using can also negatively impact your credit figure Prioritizing paying down high-interest debt will both reduce your overall debt and improve your credit physical condition This will benefit your broader financial future What types of debts do you have The kind of debt you carry matters just as much as the amount Particular debts like mortgages or low-interest auto loans are considered good or constructive debt because they typically offer long-term benefits or lower interest rates If these debts constitute the bulk of what you owe and you re comfortably meeting your minimum monthly payments focusing on savings is often the wiser move Bankrate s take However if greater part of your debts are short-term obligations like credit cards or high-interest personal loans prioritizing debt payoff will often be the more financially beneficial strategy Can you budget for savings and debt payoff Consider your monthly cash flow precisely You may not need to choose exclusively between saving and debt repayment Instead allocating a few money each month toward debt while simultaneously contributing to savings could be the the greater part practical path This strategy allows you to steadily reduce debt while incrementally building your crisis fund It will help protect you financially from future setbacks without sacrificing progress on your debts What are your other financial goals Think about your broader financial picture Perhaps you re aiming to purchase a home expand your schooling or buy a new car soon These goals may require you to save for down payments or initial costs even if you have selected outstanding debt Reducing your debt can boost your credit sum making you more attractive to lenders and potentially securing better rates on loans However without sufficient savings for a down payment your plans might fall through Balancing your debt repayment with targeted savings could be necessary to meet your personal goals Can you consolidate your debt Consolidating high-interest debts into a lower-interest loan or transferring credit card balances to an interest-free introductory period can reduce the cost of your debt significantly If consolidation lowers your average interest rate or allows you to pay down debt faster without additional fees it can free up cash that you could direct toward savings Money tip Be cautious before making this decision Ensure you can pay down any transferred balances before promotional periods expire to avoid falling into further debt How to determine which to tackle first Deciding whether to tackle debt or focus on building your emergency fund comes down to comparing the interest rates you re paying versus the expected earnings from savings Let s look at a practical example to illustrate how this works Say you have an auto loan with a interest rate and you ve consistently made your monthly payments on time You re also considering putting extra cash into a high-yield savings account offering a annual percentage yield APY At first glance it seems logical to pay down your auto loan first because its interest rate is higher But it s not perpetually that straightforward Your auto loan contributes positively to your credit profile in several techniques It adds to your credit mix It helps maintain longer credit history It demonstrates a consistent payment record Keep in mind These are all key factors in building or maintaining a healthy credit tally Paying off this type of debt too hastily means losing these benefits prematurely On the other hand putting extra funds into a high-yield savings account creates a stronger financial cushion Savings can prevent reliance on credit cards or loans when unexpected expenses arise This protects you from accumulating more high-interest debt in the future If you change your mind later you can inevitably apply a lump sum from your savings toward paying down your loan Bottom line Ultimately deciding whether to prioritize debt payoff or savings doesn t have to be an either-or situation For countless people alternating between building an urgency fund and reducing debt proves greater part effective Start with creating an initial safety net Aim for at least one month s worth of essential expenses After establishing this baseline shift your focus to aggressively tackling high-interest debts like credit cards to stop interest from eating away at your finances Once your most of costly debts are under control build up your urgency savings to a peaceful cushion of three to six months worth of expense Once you establish a calm savings cushion turn your attention to paying down long-term lower-interest obligations like auto loans novice loans or a mortgage This will help you balance your payments with other financial goals By strategically alternating your approach you can steadily achieve greater financial stability while minimizing stress Bankrate com Distributed by Tribune Content Agency LLC