3 Reasons You MUST Have an Emergency Fund Before Paying Off Debt

by Travis Pizel · 27 comments

So you’ve made that very difficult first step and decided it’s time to do something about your debt. Maybe you’ve reached the end of your financial rope. Perhaps you signed up for a money management program, enrolled in a debt relief plan, or maybe you’re doing it all on your own.

You’re excited about the prospect of finally getting your finances on track and starting down the path to achieve this thing called financial freedom that you’ve heard so much about. But before you take the plunge, there’s one prerequisite to getting started.

You need an emergency fund.

This probably isn’t news to you. You have likely heard an earful regarding the importance of an emergency fund from the experts. I’ve been there, and heard the same things.

However, I didn’t listen, and kept thinking that I was pretty good about rolling with whatever life throws at me. I thought I could just adjust my spending when something unexpected came up and I would be fine. I found out the hard way that approach doesn’t work very well.

Let me give you a few examples of why you must have an emergency fund before paying off debt.

A Tight Squeeze During the Holidays

It was right after Thanksgiving, and the holiday shopping season was in full swing. We were feeling pretty proud of ourselves for saving up money to buy presents for the kids and continue to make our monthly payment to our debt management program.

I strolled past the TV during commercial break of a football game into the laundry room and started the washing machine up to wash a load of clothes. Except it didn’t work. It made the most awful of sounds, the agitator refusing to move. We called a repair man who confidently assured us he knew exactly what was wrong. With parts and labor, it was going to cost us close to $200 to have it repaired.

During Christmas shopping season that’s a difficult bill to swallow, especially when you have a debt payment to make on your tight budget.

Unforseen Repairs on the Family Car

With warmer temperatures arriving during Springtime, I rolled down the car windows to get some fresh air as I ran an errand. I heard a squeaking sound coming from the front driver’s side tire that I instantly knew meant my brakes were in need of repair. We didn’t have the $300+ needed for the repair, just laying around, and it was extremely difficult to stretch our budget enough to squeeze out that kind of money all at once.

In both of these instances, we ended up having to borrow money from a family member and pay them back over time.  We were already in a lot of debt, and having these two emergency expenses pop up, set us back even further.

These two examples clearly illustrate the importance of having an emergency fund before you begin paying off debt:

  1. You Can Avoid Crisis Mode: If you don’t have an emergency fund, it puts you into crisis mode every time you have an unexpected expense. Paying off debt is stressful enough, make it just a bit easier on yourself and have a cash reserve built up before devoting your time, energy, and funds to paying off debt.
  2. You Won’t Kill Your Momentum: If you temporarily divert funds away from your debt payoff efforts, you may lose any momentum you had. Doing so will also make it easier to justify the same circumstances in the future.
  3. You May Not Have the Money: If you’re using a money management program, or doing it on your own, you may have the funds to divert to an unexpected expense temporarily. However, if you’re enrolled in a debt relief program (like I was), that may not be an option. I had to make my payment each month, or run the risk of getting kicked out of the program by the creditors. My budget was tight, and I didn’t have an emergency fund.

Had I started with an emergency fund, it could have made my debt repayment journey much easier. I might even have been able to contribute a small amount to a savings fund each month, or rebuilding it after I had used it. I can count on one hand how many true emergencies we had during the 55 months we were paying off our credit card debt, but each of them was a full-fledged, five alarm crisis.

If you’re thinking about diving into an intense program to pay off your debt, do yourself a favor and learn from my mistake. Take the first step, open a new savings account and start building up an emergency fund before making the next steps in your debt pay off plan.

Are you in the process of paying off debt but don’t have an emergency fund? What’s your best tip for jump starting an emergency savings plan?

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{ read the comments below or add one }

  • anne says:

    Reasons not discussed.
    A. You need 3 Mos of critical expenses before disability insurance kicks in . If you both work, your partner will miss work taking care of you. Buy up gap insurance if you aren’t able to cover it.
    B. Illness, car accidents happen to you and your family.
    Don’t be a jerk. An emergency fund is the only way you can handle these, and a $1000 isn’t going to cut it.
    personal note: I paid out of pocket for nursing home expenses for my 25 yo. brother who was in a car accident, plane tickets, hotel, pay movers to move him out of an apartment. He had great disability coverage…. after 90 days…It took 6 Mos to get an insurance claim processed And most of it went to the out of state attorney I had to hire. Yeah, you need a boatload of cash about every 10 years.

    • The $1000 figure I mentioned in the comments was the “liquid” portion of an emergency fund – just sitting there in a bank account. I certainly agree that people should have more than that available – but in other investment vehicles that actually make their money grow. Money sitting in a savings account will actually lose real value because the interest rates are SO low right now. Thanks for reading, and for your comment!

  • Kenny Schneider says:

    Totally agree with you David! I am a CPA with a Masters in Business, am a licensed Realtor, and a Financial Peace University Coordinator. I can’t stress enough how important a baby emergency fund is! You need it to keep yourself motivated. Otherwise, you’ll start feeling like a rat in a wheel, paying down one bill while another one crops up causing a crisis.

    The emergency fund is insurance against all of life’s uncertainties and it should be your primary goal before paying down any debts.

  • I agree with all of this. If you don’t have an emergency fund eventually, something is going to come up and you are going to have to take a step backwards. If you have to go into more debt when that happens that could be a real morale killer.

  • Den says:

    To us, it wasn’t a question of “if” the car would need repairs, new tires, brakes…..or “if” a major appliance would break, someone would get sick, etc ….it was a question of “when”!

    Once we framed it like that, having an emergency fund seemed like the smart thing to do….and over 5 years of paying off debt, we’ve used that EF a few times but have NEVER had to add to our debt – that feels great!

  • My wife and I have been seeing the importance of having an emergency fund, although it took us a while. We have $1000+ now and working towards three months of expenses.

    • It’s hard to shift your perspective from pouring all your money into debt reduction, or investing, or even spending. But you know, if you hit yourself in the knee with a hammer enough times, eventually you figure out that hurts, right? That pretty much describes how it worked with me. 🙂

  • fredjohnson says:

    Having an emergency fund of at least 3 months expenses—and preferably 1 yrs worth–is only common sense. Enough said.

    • Depends upon how you define your emergency fund, Fred. Having a year’s worth of money sitting in a low interest savings account is a huge amount of money that isn’t going to grow, and is actually losing money in relation to inflation. I prefer to have $1000 in a savings account for quick access, and then other funds in something that has a bit more ability to grow, yet is still liquid enough to be able to get my hands on within a week or so. Thanks for reading!

  • David Ning says:

    Just the fact that you gain peace of mind with a small emergency fund should be enough for everybody to have one. Otherwise, you are spending all your energy battling crisis after crisis when you should be using your mental capacity to see how you can get out of debt in a more efficient way.

  • If you have high interest debt, I think you should have enough in the bank to cover your bills and a little extra so you don’t get dinged with more fees. But beyond that first little bit, I think the focus should be on paying off that debt. Holding months worth of money in a low interest savings account while paying huge interest on credit card debt ends up costing you a lot of money that you could be using to pay down that debt!

    The emotional reasons you listed are very valid and it is important to be able to follow through with plans to make sure the debt is actually paid off.

    • David Ning says:

      I agree with your approach, but I would add the obvious fact that people should do whatever they possibly can to avoid high interest debt. For most people, they get into trouble because they just don’t realize how devastating being in, say credit card debt, could be.

      Once they start paying down that high interest debt though, it’s imperative that they hold the line and not cross over to the dark side ever again. It could seem difficult but for most situations, it’s all a matter of mental adjustments!

    • Great thinking, Emily – I’m not a fan of the 6-9 months worth of living expenses in an efund. That’s a huge chunk of coin sitting in a low interest savings account actually losing value (in relation to inflation). Why not find somewhere that can allow your money to grow, but still maintain some liquidity if it’s needed, right? Thanks for sharing your thoughts!

  • Nick says:

    It has always baffled me how once I built up my emergency fund, I stopped having emergencies. Not sure why this happens, but as you say building an emergency fund is a critical component to any financial plan, especially to help get you out of that debt cycle where it is so easy to stay stuck in.

    • David Ning says:

      Perhaps part of the reason is that emergencies are no longer emergencies when you actually have funds to pay it off. The $1,000 may not seem as important because you just don’t spend time worrying about small expenses that come up anymore.

    • LOL, that’s an interesting perspective, Nick. I agree with David…maybe they just don’t seem like emergencies anymore. they’re just things you have to take care of, and then you can proactively work to build that efund back up!

  • Money Beagle says:

    Having some cushion is important as you point out. One way to look at it is that $1,000 will probably not make a huge difference in your debt payoff, but it could make a huge difference in paying for an emergency. When looking at what has the most bang for the buck, that first $1,000 for emergencies definitely wins.

    • David Ning says:

      It can be hard to see $1,000 just sitting there since you know you are paying interests on your loan balance, but you are right, that first $1,000 provides enough security that it’s likely worth the interest cost.

    • Absolutely, Money Beagle. The reduction in stress level in knowing you can take care of the need for new brakes, or tires, or repair of an appliance is invaluable. Not to mention being able to take care of such a thing immediately when it DOES happen – and it will happen. thanks for your comment!

  • You make a great point. Having an emergency fund in place before paying off debt is very important if you don’t want to go into more debt. You don’t need a fully funded emergency fund, but you should have at least $1,000. I recommend more like $1,500, but at least $1,000 should hold you off for unexpected expenses.

    • David Ning says:

      I feel like the amount should be based on how much your expenses are in general. How often will you have an emergency that falls between $1,000 and $1,500? If the answer is practically never, then $1,000 is probably just as good as $1,500. If unexpected bills always seem to exceed $1,000, then you definitely need more.

    • As David said, the amount is likely a personal decision based upon you own life. I can’t remember the last time we had an unexpected expense that was more than $1000. But there’s nothing wrong with $1500 either. 🙂 Thanks for reading!

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