Drowning in Debt? You May Want to Do This Surprising Thing Before You Start Paying It Off

If you owe money on credit cards or have other debt, making a plan to pay it back ASAP is a smart choice. But before you begin sending extra monthly payments out of your checking account to your creditors, it's a good idea to accomplish another important thing first. Here's what it is.

Do this before you begin paying off debt

Before you start making extra payments toward your debt, make sure you have between $500 and $2,000 in a savings account as an emergency fund. The specific amount will vary depending on your income; higher earners should aim for around $2,000 and those who earn less can target the lower end of that range.

It may seem strange to put money into a savings account and let it sit there while you pay interest to a creditor. But it's actually really important that you do this, even if that means you have to just make minimum payments on your debt and put off paying extra toward principal for a few months. 

You should put this money into a savings account so it's there for you as an emergency fund. Ideally, over the long term, you'll want to save an emergency fund amounting to three to six months of living expenses. It can take a really long time to save up that much, though. If you start with a "mini" emergency fund of around $500 to $2,000, perhaps you won't have to pause debt payoff for that long and you'll still have some emergency savings. 

Here's why it makes sense to save up an emergency fund first 

So why would you want to save up an emergency fund if you're in debt, rather than just focusing on getting your debt paid down as soon as possible? There's a very simple reason. Emergencies can and do happen at any time, to anyone, and you don't want to be caught unprepared.

Pew Charitable Trusts found a whopping 60% of households had experienced an emergency over the prior 12 months. You very well could be one of those people who faces surprise expenses. That's especially true if it's going to take you a few years to pay off your debt in full. It is almost inevitable that some unplanned expenditures will crop up during that time.

When surprise expenses happen, you don't want to go back into debt to pay them and undo progress you've made on reducing your existing balances. Doing so could be demoralizing and undermine your efforts at debt repayment. It may also not be easy or feasible to just borrow your way out again when an emergency strikes, as it can take time to get a personal loan and not everything can be put on a credit card.

If you want to get out of debt and stay for good, build your mini emergency fund first. That way, once you shift over to debt payoff, you'll have this financial cushion. You can rely on it if you need to, so your debt repayment efforts aren't undone by a stroke of bad luck that comes your way.