A Small Emergency Fund Is Essential To Debt Pay Off Success

Are you ready to pay off your debt but have no clue where to start? 

Read the first post in my series about paying off your debt, then read through this series until you get to this post, our sixth in the series.

I bet you’re excited about the money you’ve been saving by paying attention to the little things.

Now you want to know what you’re supposed to do with it.

Well, today’s your lucky day, because what you need to do with the money you’re saving is to set up a small emergency fund BEFORE you start paying off your debt.

It might seem counter-intuitive to put money in a bank account that earns less than 1% interest when you’re paying even more interest on your debt. However, it makes perfect sense based on the mindset you’ve been adopting throughout this series.

The goal is to completely change your life and pay off your debt for good. Having a small emergency fund gives you a much better chance of making that a reality.

Why You Need A Small Emergency Fund

Our goal is to completely destroy any consumer debt you have while never incurring any additional consumer debt. With that in mind, does it make sense to have no funds available for unexpected emergencies?

If an emergency pops up that you have to pay for immediately and you’ve spent every penny you have paying off your debt, how would you pay for that emergency?

You’d have to incur more debt to pay for your emergency. That’s exactly what we want to never happen again.

You might want to argue that it doesn’t matter if you incur just a little bit more debt for the emergency because in the end, you’ll still pay less in interest by not having an emergency fund.

That may be true for the most dedicated debt destroyers, but for the majority of people you’d probably be wrong. Why? Because paying for your emergency with more debt breaks all of the good habits you’ve practiced since swearing off consumer debt for good.

Once you break out the credit card just one time to pay for your emergency, you remember how it feels to swipe the card and not have to immediately pay for the purchase you just made.

This is dangerous territory for anyone who has gotten into serious debt. You don’t want to take any chance of relapsing into your old consumer debt incurring ways.

The small emergency fund will allow you to pay for most emergencies with cash. This will keep you from breaking out the credit cards and it will prevent you from taking the chance of relapsing into debt incurring bad habits.

What happens when you use some of the emergency money? Simply pause your extra debt payments and rebuild the emergency fund to your desired amount. Which brings up a great question. How big should your small emergency fund be?

How Much Is A Small Emergency Fund?

The amount of your emergency fund should be specific to your personal situation. Some people with very few expenses could probably get by with an emergency fund as small as $500.

If you have a more average budget, I’d probably go for about $1,000 to $1,500 on the high end. Of course, if you’re seriously worried about debt relapse, the absolute most I’d recommend is one month’s worth of expenses.

The key when deciding on the amount of your emergency fund lies in how expensive some of unexpected items would be for you.

If you got into a car accident, what is your auto insurance deductible? If you had a medical emergency, what is your health insurance deductible? If you have a car that’s slowly biting the dust, how much do you think it’d cost to get your car running again?

Try to think of the possible emergencies that would prevent you from your goal of never going into more consumer debt again. Then, choose an appropriate sized emergency fund.

Just remember, only choose a number big enough to get by. You don’t want a ton of money sitting in cash only earning 1% or less when you have credit card debt interest racking up at 20% or more.

You don’t need to have an emergency fund large enough to cover big emergencies like job loss yet, because if something that large happened you’d have much bigger problems than trying to pay off your debt as fast as possible.

Once you’ve paid off your consumer debt you can work on building your emergency fund to a larger level to cover these types of emergencies.

Don’t Use Your Emergency Fund For Fake Emergencies

One last note about the small emergency fund you’ll be building. Don’t use it for fake emergencies. Doing so is just as bad as incurring more consumer debt. Finding a great deal on a vacation or an item you’ve been wanting forever is not an emergency.

An emergency is only something that threatens your life, your health, or your wealth. A broken down car that can’t get you to your job threatens your wealth. A car with a broken air conditioning system doesn’t.

Know the difference and don’t use your emergency fund on fake emergencies.

The next step in your debt pay off journey is to learn about the different debt pay off methods. We’ll start with the debt snowball method. Read about it here.

Are you already on your way to completing your E-fund? How much will you keep in it? Have you ever had to use your emergency money? I want to know all about you and your adventures on building your cash stash. Leave a comment down below!

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About Lance Cothern

Lance Cothern, a Certified Public Accountant (CPA) licensed in the Commonwealth of Virginia, is the founder of Money Manifesto. You can read more about him here or connect with him on Facebook, Twitter, Google+ or Pinterest.


  1. Getting and keeping an emergency fund was one of the hardest things for me to do as I was so focused on getting credit cards paid off. I’d put every spare penny toward the credit card and then of course we’d need to get a car fixed, or deal with a home repair. And since we didn’t have the cash, of course it would go right back on the credit card. Once we finally got some breathing room with an emergency fund our momentum picked up. Of course if we used the emergency fund, the credit card payments slowed until we built the fund back up. But we persevered and now have a huge emergency fund that we continue to add to, and we are totally debt free. Having a cash fund is so incredibly freeing, I can’t describe how secure I feel with it. Keep on preaching!!

    • Kathy, I’m glad it worked out for you! Some people think it doesn’t make sense, and logically it might not, but emotionally and in actual practice it actually does!

  2. I got hit HARD last year by surprise car expenses and I can 100% assure you that you will need more cash than you think you need for emergencies. It’s just a matter of time before one of them gets you!

  3. I have had $1000 in my savings as an emergency fund for about 2 months. It’s the first time my husband and I have ever saved money just to have for an emergency. It’s shocking to me that we have been able to keep it there. Its all about being in debt pay off mode. It feels so good to have that money there if we need it versus running to a credit card if we had an emergency.

    • Awesome job Sarah! That’s exactly why I like the idea of a small emergency fund while paying off debt! Good luck on your debt pay off journey! I hope you pay it off soon 🙂

  4. i transferred all my banking services to a national credit union and i received back my refund i put away 500 in a CD which let me add more money as i want and i also have a saving as well which i put a small amount. I have two checkings one for budget purposes and another for bill payments.

    my best friend gave me a budget worksheet and it helping me get my finance back in line. im debating if to close out my south west credit card. I tried asking the if they can waive the fee and they told me no.

    • I’m glad you’re getting your finances back in line! That’s awesome! If you have a lot of debt, I’d probably close the southwest credit card unless you’re getting more value than the annual fee. That $69 or $99 could probably be put to better use elsewhere. If you ever carry a balance on that card, then you’re probably paying more in interest than you’re earning in rewards. If you don’t carry a balance on your credit cards, you may want to look into the Citi Double Cash card which gives you 2% cash back, 1% on purchases and 1% on payments.

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