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Figuring out which step to take first can be tricky. Here’s why you should build your emergency savings before doing anything else. [[{“value”:”
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Any time you focus on improving your personal finances, you’re doing something right. But sometimes, one step may be better than another to reach your goals.
If you’re trying to figure out whether to pay off your debt first or build an emergency fund, you should probably put money into your savings account first. Here’s why.
Build emergency savings first
The main reason why you should focus on having an emergency fund first is because financial emergencies are inevitable.
Let’s say you want to pay off $5,000 in credit card debt and have $0 in your savings account. Even if you come up with the best debt payoff strategy, pay down the debt every month, and cut back on other spending, you won’t be immune to a financial emergency.
One car repair or leaky roof could completely derail your debt payoff plan. That $5,000 in debt could quickly turn into $7,000 or more if you don’t have an emergency fund.
Start with $1,000 in emergency savings
Many financial experts recommend having $1,000 in your emergency fund. Is it possible a financial emergency will surpass this amount? Of course.
But the point is to have a sizable amount that can cover many minor financial emergencies and lessen the blow of larger ones. I’ve had to use my emergency fund for previous car and home repairs. Once it’s gone, I get right back to building it up.
The $1,000 goal is a cushion that makes financial emergencies easier to handle, so you can move on to your bigger goal of paying off your debt.
How to reach $1,000 in savings
If you don’t have any money in your savings account, saving $1,000 can feel like an impossible goal. The best way to tackle it is to add a small amount to your fund every month by setting up automatic deposits from your checking account to your savings account.
Automating your savings is the best way to ensure you make progress every month.
Let’s assume you’re starting with $0 in savings, and you want to build your emergency fund as fast as possible. To reach $1,000 in six months, you’ll need to put about $167 into your savings account each month.
That’s not an insignificant amount of money and will likely require financial sacrifices. You may need to comb through your monthly expenses and see if there are things you spent money on over the past few months that could have gone toward your emergency fund.
Focus on the big picture
There will be hurdles to reaching your $1,000 goal and even more as you work toward paying off debt.
But one important thing to focus on is where you want to be financially. You may not know what your finances will look like beyond one year. That’s OK. Just set one goal at a time and focus on that.
Once you reach the first one, like putting $1,000 in the bank, you can move on to the next one.
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