When your debt is growing because it’s accruing interest, the idea of money sitting idle in an emergency fund can be irritating. But, yet, an emergency fund is still a good idea. Here’s why you need an emergency fund even if you have debt:
Debt Can be Expensive
Pretty much all debt is charged interest on top of what you borrow. And this can be expensive. In fact, according to Nerdwallet, the average household with a credit card balance pays almost $1,300 every year in interest charges! That’s a lot of money. No matter your type of debt – student loans, credit cards, medical bills, etc – it’s important to focus on both paying it down and not creating more debt.
Debt Can be Stressful
Like other sources of stress, financial stress affects everyone differently. A lot of times it can interfere with quality of life by taking a toll on health or relationships – leading to even more stress! One way to help ease some of this is by setting aside at least a few dollars in an emergency fund. Doing this can turn what would be a stressful money situation, into an inconvenience that you can better afford to handle.
Emergencies Happen to Everyone
By definition, an emergency is a sudden and unexpected event that requires immediate attention. It can be many things – a car repair, home repair, a dental cavity you need filled…whatever. Never knowing when one will happen, it’s important to have a plan – because an emergency will happen to all of us at some point.
Imagine having zero dollars in emergency savings because there’s a loan you’re trying to pay off as quickly as possible. Then a fairly costly emergency happens. To fix the problem, you charge the expenses to your credit card. The next month you have to decide if you should begin to carry a credit card balance or maybe miss a loan payment. This can be a pretty vicious debt cycle!
Plan How to Save for Your Emergency Fund
To help end this cycle, you need a plan – that is, set aside money in an emergency fund. Whatever you can save can help. Granted, some debts can be huge – think an unexpected hospital stay, but most aren’t astronomical. For example, by setting aside just $30 each week, you could save $400 in just 3 months – this could help cover an average car repair bill.
Figure out a plan that works best with your lifestyle. I like to do a mix of using different ways to save money and generate extra income. For ideas, take a look at this list of ways to make extra money.
And consider opening a separate bank account for your emergency savings. Your emergency fund should be easy to access. But not so easy that you end up spending your savings on non-emergencies.