Forget Holiday Debt -- This Should Be Your Top Financial Priority Right Now

Before you attempt to tackle your leftover holiday debt, here's another move you should consider.

Many people came away from the 2020 holiday season loaded with debt. If you're one of them, first, don't beat yourself up too badly. 2020 was a rough year, and you may have wanted to compensate by making the holidays extra special for your family.

Still, you will need to tackle that debt, and the sooner you do, the less money you'll throw away on interest. In fact, you may think shedding that debt should be your first financial priority in the new year. But actually, here's one move you should make first.

Build that emergency fund

Before you use your spare cash to pay off holiday debt, check and see how you're doing on emergency savings. If you don't have enough money in the bank to cover at least three months of living expenses, you're actually better off padding your savings account and then chipping away at your debt.

Why should your emergency fund take priority? It's simple: If you don't have enough money in the bank to get yourself through a period of unemployment or to tackle unplanned expenses, you could easily wind up in even more debt the next time a surprise bill pops up.

In fact, let's say you've racked up charges this past holiday season and maxed out your credit card with a 14% interest rate. If an unanticipated expense arises that your savings can't cover, you may be forced to put that expense on a credit card charging 20% interest, thereby making that debt even more expensive. And that, of course, assumes you even have that option. If you don't have another credit card to fall back on and have maxed out your existing ones, you'll really be in hot water.

That's why building an emergency fund should always be your primary goal. Once you have that safety net in place, then yes, by all means, do your best to start whittling down that holiday debt. But complete your emergency fund first.

How to eke out extra savings

Of course, all this advice is somewhat moot if you're barely scraping by on your existing paychecks and can't see how you'll manage to save for emergencies or pay down debt. If that's the case, and you can't find any more expenses to cut from your budget, then a second job may be your answer.

The economy is tight these days, but there are jobs to be found, especially if you're comfortable with the idea of working outside the home. There's high demand for grocery delivery personnel, as one example. And since a lot of kids are falling behind due to remote learning, childcare providers and after-school tutors are also sought after.

If working outside the home is also outside your comfort zone, look at opportunities that are fully virtual, like telemarketing, data entry, or online tutoring, which some parents are more than amenable to.

Prioritize your goals

Getting rid of holiday debt is a noble goal to strive for, but your first priority should be to build a fully loaded emergency fund. Having that protection in place is a good way to avoid future debt -- and keep from digging yourself into an even deeper hole.