How to Plan for Financial Emergencies While Paying Off Debt

It's a common misconception that "emergency" also means "unexpected." Financial emergencies should be expected and planned for—six in 10 American households experience a financial emergency in any given year. Put another way, everyone has unexpected expenses sometimes. 

While it's obviously important to build up an emergency fund, it's also crucial to pay down debt for your long-term financial well-being.

So how do you balance these two needs?

Managing Debt and Savings Is Easier Than You Think, and Here's Why

Ease your mind with one simple fact: While having emergency savings is the gold standard, it's not the only way to cover an expense that comes out of nowhere. 

The truth is, paying down debt can also increase your access to emergency money—before you save a single dime. That's because paying down revolving accounts like credit cards increases your available credit. You can access that credit if the need arises. 

So your first step in improving your access to emergency cash is to pay down one account as fast as you can. The debt avalanche or snowball methods can be useful for accelerating payoff of that debt, and for creating some breathing room for emergencies. 

How to Build an Emergency Fund While Paying Off Debt

Don't neglect saving for emergencies altogether. It's a valuable habit that you should develop, even if you start by saving just $5 a week. Most of us have some small expense that we can give up at least temporarily. If you don't have a budget, make one. It can be simple. Find that $5! 

If your company offers direct deposit, take advantage. You can direct most of your paycheck into a checking account while diverting a small amount into an emergency savings account. Otherwise, make that weekly deposit part of your routine when you cash or deposit your check. Put it into a separate savings account and watch it grow every week. 

What to Do When an Emergency Happens

Here's what to do in a financial emergency:

• Assess the damage. How much will it cost you? How soon do you need funds?

• Contact creditors. If you can’t make payments, contact your lenders and credit card companies to avoid late charges, penalties, and damage to your credit rating.

• Determine what your resources are. Add up your savings and available credit. Do you have anything you can quickly sell? How about friends or family. Could you stay with someone, or borrow a car temporarily while you find a permanent solution?

• Look into emergency loans, such as payday alternative loans (not payday loans) from credit unions or personal loans with fast funding times. 

• Find community- or faith-based resources like food banks if needed.

• Contact your insurer. If a federal disaster is involved, look for disaster-related assistance and contact your insurer.

How Do You Balance Emergency Savings with Debt Payments?

If you're carrying high-interest debt, consider restructuring it and/or paying it down over adding to an emergency account that probably pays very little in interest. For example, could you move high-interest credit card debt to a lower-interest installment loan. That could let you pay it off faster or get a lower payment that allows you to save money each month.

It’s good to accumulate at least enough money to cover a smaller expense and avoid borrowing any more than is necessary. Borrowing too much too often means spending more on interest, and having less available for debt reduction or saving. And if you need help to cope with all of your debt, it might be worth learning more about debt relief. 

Smart Financial Habits to Prepare for the Unexpected

Preparing for a financial emergency involves awareness of your finances, shoring up weaknesses, and planning ahead.

1. Save enough to cover three to six months of important expenses like rent, food, and bills.

• Start small, and save a little bit each week or month.

• Keep your emergency money in a separate account.

• Set up automatic transfers to your emergency fund.

• Put at least part of windfalls and other extra money like tax refunds into your emergency fund.

2. Create a budget and track your spending.

• Write down how much you earn and spend each month.

• Focus on things you need, like rent and food, before things you want, like eating out.

• Look for ways to save money, like using coupons, cooking at home, and comparing prices.

• Check your spending and savings often to stay on track.

3. Reduce debt by committing to a plan.

• Pay off credit card bills and other high-interest debt first.

• Protect your credit to get better deals on loans.

4. Review and update insurance coverage.

• Make sure you have the right (and best-priced) insurance for health, car, and home.

• Check your coverage every year.

• Know what your health insurance covers, and how much you might have to pay.

5. Find more income.

• Find ways to earn extra money, like doing side jobs or freelance work.

• Rent out things you own—having more than one source of income helps you stay safe if you lose your job.

6. Apply for a line of credit before you need it. 

• Don't use the account for non-emergencies.

• If you can't seem to leave available credit alone, get credit counseling.

• Compare interest rates and fees, and consider how you’ll pay back the loan.

7. Organize important documents.

• Store important papers like bank statements and insurance policies in a safe place.

• Have both paper and digital copies that you can easily find.

Tips for Staying On Track with Your Financial Goals 

Once you set financial goals, the key to staying on track is feedback. If your goal for the month, for instance, was to save $100 while paying all of your bills on time, check your monthly statement. If you only added $50, circle back and figure out why. Did a heat wave increase your cooling costs that month? Did your insurance premium go up? Or did you eat lunch out a couple of extra times?

Is damage control possible? If you've got an extra $50 in your checking account, move it before it burns a hole, and resume your normal programming. If not, reset. Tomorrow is another day. It's no different from cheating on your diet—you can't un-eat that cake, but you can give the rest away and start over tomorrow. 

Forgive yourself, resolve to do better, and move on. You'll get there.