The Emergency Fund Rule That Could Keep You From Going Deeper Into Debt
When you're drowning in debt, keeping cash in savings sounds like financial sabotage. Why let money sit idle when interest is eating you alive? But commenters in a Reddit thread about emergency funds weren't having it — they argued for a different approach.
Build a small buffer first, they said, then attack the debt with everything else you've got. Sounds counterintuitive? Maybe. But here's the thing: an unexpected expense without a cash cushion doesn't disappear; it just migrates to a credit card. Peter Diamond, a federally licensed tax and accounting expert, says this strategy can be a total game-changer for people already running on fumes.
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Here's why having a small amount of savings can actually keep you from falling deeper into debt.
A Small Buffer Stops Emergencies from Becoming New Debt
We’ve all been there. Your car breaks down. Your pet needs the vet. You get sick and miss a week of work. Life happens, and without cash on hand, these emergencies end up on plastic.
“Overdraft fees are straight up predatory and ... they hurt way worse than card interest,” Redditor TallCarpenter4579 wrote. "Once you've got enough cushion that you're not sweating every autopay, then attack the card hard.”
A small accessible cash fund can mean the difference between absorbing an emergency and putting it on a credit card.
“Having some emergency liquidity is crucial,” said Diamond. “Money is always easier to put away when you don’t need it than it is to find when you desperately do.”
So, How Much of a Buffer Do You Need?
Everyone’s expenses, debt and income are different, so there’s not one right answer. The general rule of thumb is to save three to six months' worth of expenses, but here’s what Diamond suggested.
“For someone starting from zero while carrying high-interest debt, I like the idea of first working toward enough cash to cover roughly one month of essential expenses," he said.
That includes line items such as housing, utilities, groceries, insurance, transportation and minimum debt payments. Diamond said the first goal is simply to create enough liquidity that an unexpected expense doesn't immediately become new debt. Once you hit that number, you're ready to move to the next phase.
That doesn't mean you stop paying down debt until you've saved enough to cover several months. You should still be making those minimum monthly payments in addition to putting money in your emergency fund.
Once You've Built the Cushion, Go After the Debt
Redditors agree, building an emergency fund is an essential step in staying on track financially and tackling your debt.
“Once you have your 1-month [emergency fund], pivot back to paying down your high-interest debt,” future_speedbump wrote.
The point isn't to build an emergency fund indefinitely while expensive debt continues to accrue interest. In fact, Diamond recommended upping your debt payments once you've established a reasonable cash cushion.
“High-interest consumer debt — especially credit card debt — should generally be attacked aggressively because the interest can compound against you very quickly,” he said.
The Bottom Line
Starting an emergency fund while paying off debt might seem impossible, but it is doable. In the beginning, it will mean making smaller debt payments, but, that extra cash could prevent a car repair, medical bill or missed paycheck from landing on a credit card and increasing your debt.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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