Why Building an Emergency Fund Should Be Your Top Financial Goal This Year — No Matter How Much Debt You Have

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It’s natural to want to eliminate debt. But read on to see why building your emergency fund should be your priority. [[{“value”:”

Would it surprise you to learn that total U.S. debt increased to $17.1 trillion in 2023, according to Experian? I’m not particularly shocked.

Of course, not all of that is credit card debt. Credit card balances comprised $1 trillion of that total. Mortgages, by contrast, made up over $11.5 trillion.

But while you may not be in such a rush to pay off your mortgage, especially if you locked in a competitive interest rate on that loan, you may be very eager to whittle your credit card balances down to $0. And that’s great if you can pull it off.

But if you’re not all set with an emergency fund, then that should actually be your primary financial goal this year — even if your credit card is charging you boatloads of interest by the day.

Why your emergency fund needs to come first

As of August of 2023, 63% of working Americans weren’t equipped to cover an unplanned $500 expense, according to SecureSave. If you’re part of that statistic, it means your next unexpected bill could drive you even deeper into debt. And that’s why building an emergency fund should be your top financial focus this year.

Simply put, if you don’t build up emergency savings, you risk landing in even more debt when future surprise expenses arise. And that’s not good these days, given how expensive it’s gotten to borrow following the Federal Reserve’s numerous interest rate hikes.

Also, you can’t automatically assume that you’ll be able to borrow money when you need to. What if you’re almost maxed out on your credit card limit and you encounter an unplanned $700 bill? If you only have $300 left available on your card, you’ll need another way to come up with the remaining $400. And that’s why your emergency fund should take priority over paying off debt — even though you may be itching to shed your debt for good.

How much emergency savings do you need?

Your minimum goal in building an emergency fund should be to accumulate enough cash in your savings account to cover three full months of essential living costs, like rent, car payments, food, and utilities. But if you’re able to save up to six months’ worth of bills, you’ll have even more protection in the event of a costly home repair or an extended period of unemployment.

Of course, if you’re starting with little to no money in savings, you’re not going to magically build a three-month emergency fund in a matter of weeks. It will more likely take months or years, and that’s okay. The key is to work toward that goal as best as you can.

That said, you do want to get there sooner rather than later. So one option is to take on a second job temporarily to boost your income and free up more money for your savings. If you’re able to earn $15 an hour at a side gig and you manage to work 10 hours a week, that’s $600 a month coming your way, or $7,200 after a year. Depending on your expenses, that may be more than enough to cover your essential expenses for three months.

Being in debt can be stressful on top of being costly. So I totally get why you’d want to shed your debt as soon as possible.

But trust me when I say that you’re better off focusing on your emergency fund first. It could be your ticket to avoiding future debt that’s more expensive than the debt you’re currently juggling. And remember, once your emergency fund is complete, every extra penny that comes your way can be used to chip away at your debt until it’s gone for good.

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