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 a 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 could 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? Freedom Debt Relief shares four tips to tackle these common financial goals side by side.

Key takeaways:

• Starting small is key—even $100 a month toward savings or debt can build momentum and confidence.
• You might find it easier to build your emergency fund if you automate deposits into savings from each paycheck.
• A high-yield savings account can help your emergency fund grow faster while you chip away at debt.

1. Take Baby Steps

If you're hoping to simultaneously build an emergency fund and pay off your debt, allocating any amount of money is better than nothing. Start with any amount you can regularly afford. 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.

Another way to take baby steps is to pay down one or more small debts first. Once you get rid of a debt, that's a payment you no longer have to make, and you can apply that money toward another debt.

The snowball method is a common strategy and it involves lining up your balances from smallest to largest. You send any extra money to the smallest debt while making minimum payments on other debts. Then when you get to your first payoff, you use 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 debt pay-off strategy some savers like is the debt avalanche method. It's just like a debt snowball but you order your debts by interest rate so you can tackle the most expensive one first. This strategy could make sense, but studies show that people tend to have better success with the debt snowball. Paying off those smaller debts is highly motivating and could give you just the boost you need to continue.

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's natural to want to spend the money on a long list of expenses rather than save it. For most, saving money means saying no to something.

One effective strategy is to set up automatic transfers, so a portion of your paycheck goes straight to your emergency fund without you even having to think about it. Keeping the money out of your checking account could make it easier to save. If you can afford $100 out of every paycheck, you could be sitting on a $500 emergency fund within a couple of months.

You can pay yourself first in a different way by using a round-up savings app that automatically rounds up purchases to the next dollar and puts those extra cents in your savings. For example, if you spend $8.16 at the grocery store, the app automatically transfers 84 cents to your savings account.

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 savings account.

While the national average interest on savings accounts is just 0.37% as of September 2026, according to the Federal Deposit Insurance Corporation, the best HYSAs at the time of writing are still offering annual percentage yields (APYs) of 3.5% 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 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 backward. But there's no reason to regret purchasing an affordable shirt you’ve had your eye on or treating yourself to your favorite latte.

This story was produced by Freedom Debt Relief and reviewed and distributed by Stacker.