How to Build an Emergency Fund While You’re Paying Down Debt

When you’re drowning in debt, it’s easy to get tunnel vision about paying it off. But while chipping away at that debt is necessary to secure a healthy financial life, you don’t want to sacrifice another key element: an emergency fund. 

An emergency fund, as the name implies, is a bucket of money you set aside in case the unexpected happens, like when you’re dealing with a job loss, car trouble or surprise medical bill. Financial advisors usually recommend building these funds up enough so that you could cover your expenses for three to six months. But don’t let that longer-term goal discourage you: If you’re just starting out, it’s fine to focus on a more achievable amount  — say, $500 or $1,000.

Having money on hand can help keep you from having to swipe your credit card in a panic and borrowing more. But how do you balance contributing to an emergency fund while paying down your debt? Here are four tips to simultaneously succeed with these common financial goals. 

1. Take baby steps 

When it comes to both building up an emergency fund and paying off your debt, allocating any amount of money is better than nothing. If you can set aside just $100 per month for emergencies, start there. For debt payments, there’s usually a clear amount — such as a minimum payment on a credit card — that you need to hand over each month so you don’t rack up late fees, accrue more interest and hurt your credit score. 

Financial planner Pete Bosse in San Antonio, Texas says that another way to take baby steps is to pay down small loans first to “get some quick wins,” such as the credit card with the smallest balance. It’s a common strategy called the “snowball method,” that entails lining up your balances from smallest to largest and paying off the smallest first, then using the money that was going to that first debt to pay off the second. Once your “snowball” grows, you can also reallocate money that was going toward a paid-off debt into savings.

Another strategy some savers like is the avalanche method, which involves paying off the loan with the highest interest rate first. This strategy could also make sense for you, depending on your financial situation and preferences. 

While it’s fine to start with baby steps, you do want  to increase those little moves when possible. For example, if you get a raise at work, increase the amount you’re contributing to debt payments and the emergency fund. 

2. Pay yourself first

When your paychecks hit your bank account, it can be difficult to get yourself to move that money over to your emergency fund. Doing so not only means you won’t be able to spend that money on a night out with friends or a trip to the mall, it also requires you to take the extra step, which can be difficult to stay on top of when life gets busy. 

That’s why Bosse suggests removing that extra step and instead splitting up your direct deposit so that a portion of your paycheck goes directly into the emergency fund. He recently had a client who allocated $150 from each of her paychecks to her fund, which means that after just four months, she had accrued $600 without even thinking about it. 

“It’s not in the take-home pay that ends up in a checking account where you’re paying bills and paying down credit cards,” Bosse says. “By not seeing it in your account that you pay from, it really is out of sight and out of mind.” 

3. Open a high-yield savings account 

When you’re saving money while paying off debt, you need all the help you can get. Enter high-yield savings accounts (HYSAs), which offer interest on the cash you stash.

High-yield savings accounts work similarly to traditional savings accounts. They’re meant to be used for saving as opposed to where you store money for everyday purchases, though banks are no longer required to limit withdrawals (some still do, so be sure to check). The accounts may have fees and minimum balances, though nowadays, many don’t. 

But the key difference between traditional savings accounts and HYSAs is that the latter tend to offer significantly higher interest. These accounts especially benefited from the Federal Reserve’s interest rate hikes that took place between 2022 and 2024. Rates have since fallen, but there’s still no comparison between what you can earn in a HYSA versus a traditional account.

While the national average interest on savings accounts is just 0.41% as of March 2025, according to the Federal Deposit Insurance Corporation, the best HYSAs at the time were are still offering annual percentage yields (APYS) of 4% or more.

4. Celebrate your wins 

Paying off debt and building up an emergency fund can feel like a slog when compared to a financial goal like saving for a house, where the prize is finally signing that dotted line and picking up the keys. But Bosse says celebrating small wins can help keep you on track. 

Of course, you need to be careful. If you celebrate paying off a $600 loan or getting your emergency fund to $600 with a $200 dinner, you may be taking a step backwards. But purchasing an affordable shirt you’ve had your eye on or treating yourself to your favorite latte can make sense.

“Do something that rewards you for the behavior,” Bosse says.