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Build an emergency fund while paying off debt

KEY TAKEAWAYS:

✔ Being prepared for an unexpected expense gives you better financial control and helps you to avoid taking on any additional debt.

✔ When building an emergency fund, choose a realistic amount and be prepared for it to grow slowly.

✔ It is possible to pay off debt while building your emergency fund—you just need to have a plan and stay committed to it.

Balancing rent with managing your living expenses and paying off bills can make the idea of setting aside money for a ‘what if’ emergency challenging. But even if it is a small amount, setting up an emergency fund for unexpected costs can help to give you peace of mind and more financial control should something happen. 

Your emergency fund: what it IS & what it's NOT

An emergency fund is an amount of money that you set aside, untouched, to cover the cost of an unexpected expense. It should not be used to cover basic necessities or expenses and it is not part of your weekly or monthly budget. 

The types of expenses an emergency fund covers can include:

  • Car repairs. 
  • Home repairs.
  • Vet care. 
  • Job loss.

Whatever the unexpected event is, it is important that you have easy access to the money you need so you avoid having to borrow or add to credit card debt in order to cover the costs.

For more help determining how much you need to set aside for emergencies, see Emergency Fund: How Much Do You Need?

4 ways to build an emergency fund while you pay down debt

The best way to manage your debts while you set aside money for the unexpected is to budget and plan for it. Here are four tips to get you started.

1. Know how much you need to save 

A healthy emergency fund should cover three to six months of essential living expenses. To determine the amount you need, add up all your monthly expenses – rent, groceries, car payments, as well as the amount you use to pay off credit cards or loans. Depending on how much you plan to save, it will likely take time. So be patient and manage your expectations. Be sure to keep this money in a savings account where it is readily available but not too easy to access so you won’t be tempted to dip into it. Once you reach your goal, leave the money untouched and let it grow on its own. 

2. Pick the right type of account

Start by choosing a savings account that is separate from the one you use day to day. Most financial institutions offer a range of savings accounts so be sure to shop around and look for one that has no, or low, fees and allows you to take your money out penalty-free. 

Depending on how much or how long you are planning to build your emergency fund, a high-interest savings account (HISA) may be the best solution. Most HISAs won’t charge fees for basic transactions like transferring a little money from every paycheque or taking your money out if you need it. Look for an account that comes with: 

  • No monthly account fee (minimum balance required)
  • High-interest rate
  • A bonus rate when you save longer and don’t withdraw funds

3. Know your expenses and top up

The first step to building your emergency fund while you pay down debt is to create a simple budget that shows where your money is going. Then, look for any expenses you can reduce to free up some money. For example, eliminating just one monthly debt, or cancelling a subscription, could free up extra money to help you boost your savings. 

Also consider topping up your emergency fund once you’ve paid down some of your debt. If you use to have a monthly loan payment and now that loan is paid off, you could redirect some or all of that money towards your emergency fund. 

4. Explore your borrowing options

If you are struggling to manage multiple debts with different payment amounts and due dates, you may want to consider getting a loan that consolidates them into one amount with one predictable payment. This way you know how much you have to pay each month so you can create a more accurate budget, plan better, and contribute to your emergency fund. 

At easyfinancial we can work with you to understand your options and create a plan that can help you become debt-free while putting some money aside for the “what if” emergencies you can’t predict. For information on debt consolidation loans or general financial advice, please reach out to your local easyfinancial branch or give us a call at 1-888-502-3279. We are here to help.

Disclaimer: This content is intended for informational purposes only and does not constitute financial advice on any subject matter.