How to have an emergency fund when you’re still in debt


Some of you have already paid off their debts and are well on your way to becoming wealthy enough to feel safe, live easy, and accomplish anything.

But some of you are knee-deep (or neck-deep) in debt, possibly living paycheck-to-paycheck. The living is anything but easy.

I get it.

Last time, I talked about having a fully-funded emergency fund that would allow you live on it for six months. If your expenses change, you will need to have more saved up.

But what if you are saddled with student loans and credit card debt? It might seem like a fantasy land to think about having thousands of dollars in the bank just sitting there.

And you’d be right. If you’re still in debt, that’s not your plan.

But at the same time you’re not off the hook. Your plan is just a little bit different.

What is an emergency?

In a financial context, an emergency is an unexpected event (usually-but-not-always bad) that forces an outlay of money.

We can debate what constitutes an emergency. A car needing new brakes doesn’t, in my opinion, count as an emergency (as it’s not really unexpected that it will eventually happen) but it all depends on whether it’s something you’ve planned for or not. And, let’s face it, you can’t plan for everything.

Take a minute and think about the emergencies you’ve experienced in the past year or so. Chances are, most of your emergencies have hovered in the “few hundred dollars” area. (Or at least I hope so. If you’ve had major catastrophe in your life, then you’ve got larger concerns right now.)

The chronic

So what happened when you’ve encountered that few hundred dollar emergency? If the answer was to throw it on a credit card and worry about it later, that would be the typical response.

And that’s exactly the wrong thing to do.

Because by putting the emergency on the credit card, you’ve taken an acute problem (the emergency) and made into a chronic problem (debt). As for why that’s bad:

Acute problems get addressed quickly. Chronic problems do not.

More to the point, you haven’t really solved the problem. You’ve just transformed it.

Get rid of the problem

So, at the bare minimum, even if you’re deep in debt, right now, your goal should be to acquire a small amount of money and put it in the bank. Do not touch it, except in an emergency.

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How much? Remember how much your recent emergencies had cost you? That much.

If you want a prescription: start with $500. Maybe go up to $1000. But no more.

I bet you could sell something to get you most of the way there right now. But even if not, you get can on a payment plan. Put away $25 a month, $50 a month, something a month. Think of it just like another bill: you just pay it, and don’t ask questions.

With $50 a month (a little more than $1.50 a day), you could have the majority of your emergencies covered in less than a year. And that’s starting from nothing, which you may not be doing.

When you have an emergency, and you need to spend a few hundred dollars, you will have the money to pay it off. So pay it off. Get rid of the problem. Right away.

And then, you won’t have to deal with it later. You won’t have to pay interest on it later. You won’t have to think about it later. How nice will that feel?

Then, start building that fund back up again.

No matter your situation, I believe that anyone can put away $25 a month. Most people can probably put away more, especially for a short period of time.

Would it be better to have $10,000 in the bank for emergencies, rather than just $500? Of course. But for now, I’d rather you take any extra money over top of your $500 and pay off your debt. That may not be an emergency, but it’s still a problem.

But enough about me. Do you have an emergency fund? How much did you decide to have? How did you build it?

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