Should You Save for an Emergency Fund if You Still Have Credit Card Debt?

The answer may surprise you.

When you are working on repaying your credit card debt, it is really tempting to try to put every spare dollar towards this goal. After all, the interest rate on credit cards is quite high and the faster you pay off the balance, the more you will save on finance charges.

But, there's also another financial priority that you should focus on even as you're working towards paying down what you owe. You should be saving for an emergency fund even as you're sending extra money to creditors.

Why an emergency fund is important when you're paying down credit card debt

Saving up an emergency fund before making extra credit card payments is really important for a simple reason. The lack of emergency savings could push you right back into deeper debt and undo any of the progress that you've made on paying your credit card bills.

See, emergencies don't just stop happening because you're making an effort to become debt free. Surprise expenses crop up with great regularity for most people. And if you've been sending all of your extra money to your creditors, then you won't have the cash to deal with these costs when they arise. In that situation, there's a really high likelihood that you would have no choice but to put the unexpected expenses on the very credit cards that you were trying to pay down.

This may not seem like a huge deal, but the reality is that it can be really demoralizing to scrimp and save to pay down your credit card debt, only to see your hard work erased when an unexpected cost arises. You could end up becoming discouraged in your debt repayment efforts. This could make you less disciplined in sending in extra payments in the future since making progress could start to feel out of reach.

This problem could arise repeatedly each time an unexpected expense comes up. This may leave you trapped in a vicious cycle where you pay down some debt, face a big unexpected expense, and end up right back where you started, or worse. Obviously, avoiding this is best so you can be prepared for emergencies and see your credit card balance continue to go down once you start working on paying off what you owe.

Now, an emergency fund should ideally have three to six months of living expense, but you probably don't want to put off making extra payments on your cards until you've amassed such a large fund. Instead, your best bet is to save a starter emergency fund between $500 and $2,000 (depending on your income and how long it takes you to do that).

Your small emergency fund should be enough to cover most surprises that crop up, without leaving you reaching for the cards again. Once you've done that, you can focus on early credit card payoff and send extra money to creditors without worrying about ending up back in debt if something goes wrong. You can stay on track in your payoff efforts, as you'll be more motivated to do so once you see your balance going down for good.