By Sabrina Karl
According to the Federal Reserve, more than a third of U.S. households report that if faced with a $400 emergency, like a surprise car repair or medical expense, they would have difficulty covering it or would not be able to pay it at all.
Of course, some emergencies cost much more than $400. If the Fed’s survey question instead asked about an unexpected $1,000 or $2,000 expense, you can imagine how many American households would be unprepared.
That’s why having an emergency fund is smart. By holding some funds in reserve, an unexpected expense won’t send shock waves through your ability to make ends meet.
But what if you also have debts? Paying down expensive loans and credit card balances is also wise advice. So for someone with no emergency fund and substantial debt, what should you prioritize?
Although there isn’t a “one size fits all” answer — as each person’s debt profile is different, as is the predictability and reliability of their income — one thing is certainly recommended: Always make the minimum required payment on all debts on time. That is priority No.1 so you don’t incur extra fees, increased rates, and hits to your credit score.
After that, a smart second priority is to build up a minimal emergency fund. Though the standard advice is for adults to hold 3-6 months’ worth of expenses in reserve, that can be a tall order that takes some time to achieve.
So start instead with smaller goals, like socking away $500, then maybe $1,000. Though you’ll ultimately want to build up much more than this, creating at least a minimal safety net is a good initial move before shifting your focus to paying down debt, and can help you avoid taking on further debt if a surprise expense hits.