1. DEBT SOLUTIONS

How to Build an Emergency Fund While You’re Paying Down Debt

How to build an emergency fund while you are buying down debt
 Updated 
Aug 19, 2025
Key Takeaways:
  • Starting small is key—even $100 a month toward savings or debt can build momentum and confidence.
  • Automating savings through direct deposit makes it easier to consistently grow your emergency fund.
  • A high-yield savings account can help your emergency fund grow faster while you chip away at debt.

When you’re drowning in debt, it’s easy to get tunnel vision about paying it off. But while chipping away at that debt is necessary to secure a healthy financial life, you don’t want to sacrifice another key element: an emergency fund

An emergency fund, as the name implies, is a bucket of money you set aside in case the unexpected happens, like when you’re dealing with a job loss, car trouble, or surprise medical bill. Financial advisors usually recommend building these funds up enough so that you could cover your expenses for three to six months. But don’t let that longer-term goal discourage you: If you’re just starting out, it’s fine to focus on a more achievable amount—say, $500 or $1,000.

Having money on hand can help keep you from having to swipe your credit card in a panic and borrowing more. But how do you balance contributing to an emergency fund while paying down your debt? Here are four tips to tackle these common financial goals side by side. 

1. Take Baby Steps 

If you're hoping to simultaneously build an emergency fund and pay off your debt, allocating any amount of money is better than nothing. If you can set aside just $100 per month for emergencies, start there. For debt payments, there’s usually a clear amount—such as a minimum payment on a credit card—that you need to hand over each month so you don’t rack up late fees, accrue more interest, and hurt your credit score. 

Financial planner Pete Bosse in San Antonio, Texas says that another way to take baby steps is to pay down small loans first to “get some quick wins,” such as the credit card with the smallest balance.

It’s a common strategy called the “snowball method," and it involves lining up your balances from smallest to largest and sending any extra money to the smallest first (while making minimum payments on other debts), then using the money that was going to that first debt to pay off the second. Once your “snowball” grows, you can also reallocate money that was going toward a paid-off debt into savings.

Another debt pay-off strategy some savers like is the debt avalanche method, which sees you focused on paying off the loan with the highest interest rate first. This strategy could also make sense for you, depending on your financial situation and preferences. You may also save a little money on interest with the debt avalanche method.

While it’s fine to start with baby steps, you do want  to increase those little moves when possible. For example, if you get a raise at work, increase the amount you’re contributing to debt payments and the emergency fund. 

2. Pay Yourself First

When your paychecks hit your bank account, it can be difficult to get yourself to move that money over to your emergency fund. Doing so not only means you won’t be able to spend that money on a night out with friends or a trip to the mall, it also requires you to take the extra step, which can be difficult to stay on top of when life gets busy. 

That’s why Bosse suggests removing that extra step and instead splitting up your direct deposit so a portion of your paycheck goes directly into the emergency fund. He recently had a client who allocated $150 from each of her paychecks to her fund, which means that after just four months, she had accrued $600 without even thinking about it. 

“It’s not in the take-home pay that ends up in a checking account where you’re paying bills and paying down credit cards,” Bosse says. “By not seeing it in your account that you pay from, it really is out of sight and out of mind.” 

You can pay yourself first in a different way by using a round-up savings app that automatically rounds up purchases to the next dollar and puts those extra cents in your savings. This is a painless way to save, as well.

3. Open a High-Yield Savings Account 

When you’re saving money while paying off debt, you need all the help you can get. Enter high-yield savings accounts (HYSAs), which offer interest on the cash you stash.

High-yield savings accounts work similarly to traditional savings accounts. They’re meant to be used for saving as opposed to where you store money for everyday purchases, though banks are no longer required to limit withdrawals (some still do, so be sure to check). The accounts may have fees and minimum balances, though nowadays, many don’t. 

But the key difference between traditional savings accounts and HYSAs is that the latter tend to offer significantly higher interest. These accounts especially benefited from the Federal Reserve’s interest rate hikes that took place between 2022 and 2024. Rates have since fallen, but there’s still no comparison between what you can earn in a HYSA versus a traditional savings account.

While the national average interest on savings accounts is just 0.42% as of May 2025, according to the Federal Deposit Insurance Corporation, the best HYSAs at time of writing were are still offering annual percentage yields (APYs) of 4% or more.

4. Celebrate Your Wins 

Paying off debt and building up an emergency fund can feel like a slog when compared to a financial goal like saving for a house, where the prize is finally signing that dotted line and picking up the keys. But Bosse says celebrating small wins can help keep you on track. 

Of course, you need to be careful. If you celebrate paying off a $600 loan or getting your emergency fund to $600 with a $200 dinner, you may be taking a step backwards. But purchasing an affordable shirt you’ve had your eye on or treating yourself to your favorite latte can make sense.

“Do something that rewards you for the behavior,” Bosse says.

Consider All Your Debt Help Options

If you're struggling with your finances, it's worth exploring debt relief options. Find out today if Freedom Debt Relief can help you conquer your debt and get on the road to a better financial future.

A look into the world of debt relief seekers

We looked at a sample of data from Freedom Debt Relief of people seeking the best debt relief company for them during July 2025. This data highlights the wide range of individuals turning to debt relief.

Credit card balances by age group for those seeking debt relief

How do credit card balances vary across different age groups? In July 2025, people seeking debt relief showed the following trends in their open credit card tradelines and average credit card balances:

  • Ages 18-25: Average balance of $9,117 with a monthly payment of $283

  • Ages 26-35: Average balance of $12,438 with a monthly payment of $366

  • Ages 36-50: Average balance of $15,436 with a monthly payment of $431

  • Ages 51-65: Average balance of $16,159 with a monthly payment of $523

  • Ages 65+: Average balance of $16,546 with a monthly payment of $499

These figures show that credit card debt can affect anyone, regardless of age. Managing credit card debt can be challenging, whether you're just starting out or nearing retirement.

Credit card debt - average debt by selected states.

According to the 2023 Federal Reserve Survey of Consumer Finances (SCF) the average credit card debt for those with a balance was $6,021. The percentage of families with credit card debt was 45%. (Note: It used 2022 data).

Unsurprisingly, the level of credit card debt among those seeking debt relief was much higher. According to July 2025 data, 88% of the debt relief seekers had a credit card balance. The average credit card balance was $16,113.

Here's a quick look at the top five states based on average credit card balance.

StateAverage credit card balanceAverage # of open credit card tradelinesAverage credit limitAverage Credit Utilization
District of Columbia$16,2907$24,10281%
Louisiana$14,6149$28,79180%
Arkansas$14,0859$27,26178%
Indiana$13,9338$25,73178%
Kentucky$13,0418$26,15678%

The statistics are based on all debt relief seekers with a credit card balance over $0.

Are you starting to navigate your finances? Or planning for your retirement? These insights can help you make informed choices. They can help you work toward financial stability and security.

Manage Your Finances Better

Understanding your debt situation is crucial. It could be high credit use, many tradelines, or a low FICO score. The right debt relief can help you manage your money. Begin your journey to financial stability by taking the first step.

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Author Information

Mallika Mitra

Written by

Mallika Mitra

Mallika Mitra is a writer and editor helping people make smart decisions with their money. She was previously an editor at Money, where she oversaw a weekly newsletter focused on investing. She has covered a wide range of personal finance topics, including Gen Z and money, retirement savings, financial scams, cryptocurrency, and meme stocks. She continues to write for money.com.