How To Build An Emergency Fund While Paying Down High Interest Debt

Although you can’t plan for a rainy day, it is still important to be prepared for when a rainy day comes. Having an emergency fund is good financial health. Contributing to your emergency fund, even as you pay down debt, is an example of strong financial hygiene.

As reported by U.S. News, 2 in 5 Americans don’t have an emergency savings fund. Nearly 40% couldn’t cover a $1,000 emergency expense with cash or savings. Even more shockingly, 60% said that they had experienced an unexpected expense within the past year.

For individuals who find themselves torn between saving for a rainy day or paying down high-interest debt, there are a few techniques that can help you accomplish both. Let’s explore a few simple techniques that can help you reach your financial goals.

Money Watch Guides published a survey of 2,000 people. Of the total surveyed, 57% stated they live paycheck to paycheck. Living with little to no extra money makes it hard to save. If you haven’t read Rich Dad Poor Dad by Robert Kiyosaki, this is a great place to start. In the book, Robert Kiyosaki talks about paying yourself first. The idea is that if you don’t invest in yourself first, you will always be behind the ball, chasing it. By paying yourself first via savings and assets, then paying obligations such as debt and expenses second, you will always have enough money to invest in your future.

A consumer credit data analysis by The Century Foundation showed that roughly half of active cardholders and 40 percent of U.S. adults are unable to pay their credit card bills in full. As a result, cardholders carry a balance from month to month.

Carrying a high balance on your credit card that has high interest rates can make it hard to save. To combat this, the utilization of high-interest savings accounts is like a two-in-one deal. You are saving (no matter how little), and the bank is paying you to save, with free money! Utilizing the interest from the savings account to pay down high-interest credit card balances is a win-win. You save and pay down debt at the same time.

Sometimes it is best to keep things simple. The envelope method is great for people who are very hands-on and live by the “out of sight, out of mind” mentality. Nerd Wallet defines the envelope method as a budgeting method where you put physical cash into envelopes, each labeled for a specific expense, to portion out your monthly income. Benefits of the envelope method include:

• Money is allocated to exactly where you want it to go
• Visual representation of where your money is going
• Provides flexibility
• Prevents overspending
• Improves discipline
• Simplifies financial money management

The envelope method is a simplified way to budget. Using this method will allow you to visually put aside money for an emergency fund and set aside money to pay down your high-interest credit cards.

Saving for a rainy day while paying down high-interest credit cards might require a little creative thinking. A few hands-off approaches worth mentioning include:

• Auto draft- use online banking portals to take a portion of your earnings and set it to automatically go into a savings account (preferably high interest)
• Smart small- starting with a small budget for both the emergency fund and paying down high-interest debt can motivate you as you hit your realistic milestones
• Set goals- setting a goal can motivate you to stay on track
• Cut expenses- cutting expenses and even downsizing your lifestyle are quick and easy ways to save money and pay extra money toward your high-interest credit card debt.

Building an emergency fund while paying down high-interest debt does not have to be complicated. With the right method, financial freedom is closer than you might think. Budgeting does not have to be scary. Start saving today, your future self will thank you!