Save or Pay Off Debt

When you’re carrying around debt, saving up money for an emergency might not seem like a priority, but it should be. Having a savings safety net can help you financially prepare for unexpected expenses, which can keep you from taking on more debt. We’ll explain why you need an emergency fund and how to save for it while paying off your debt.

Why do I Need an Emergency Fund?

Life is full of surprises, and most of those surprises have price tags attached to them. Having an emergency fund can prevent unexpected expenses from becoming big financial burdens, and if you already have debt, you want to avoid taking on any more.

Your emergency fund can cover unexpected costs resulting from:

  • Car repairs
  • Home maintenance
  • Medical bills
  • Job or income loss
  • Unplanned bills or payments

How to Save for an Emergency Fund

A well-established emergency fund should cover between three and six months of expenses. But don’t let that intimidate you from starting one. You can build your savings over time with these three steps:

Step 1: Set up an emergency fund account

The easiest way to save for an emergency fund is by establishing a dedicated account. Consider opening a new savings or money market account to keep your emergency funds separate from your daily expenses.

At FirstCapital Bank of Texas, our First Savings account features a low minimum opening deposit and competitive interest rates, so you can save and earn at the same time to grow your emergency fund faster. In the case of an emergency, you can quickly transfer funds to a checking account or visit an ATM or branch to withdraw cash.

Step 2: Use automatic transfers to grow savings

With online and mobile banking, automating your savings is easier than ever. Put these convenient tools to work for your emergency fund and grow your safety net faster with less effort.

Our free online and mobile banking lets you set recurring transfers weekly, biweekly, or monthly—it all depends on you and your budget. Contributing just $25 a week can add up to $1,300 over the course of a year.

Step 3: Don't touch it (unless it's an emergency)

It may be tempting to use the money in your emergency fund, but it’s best to keep your hands off of it. An impromptu dinner with friends or vacation getaway is not an unplanned financial emergency. Budget separately for discretionary expenses like these and keep your emergency fund for unavoidable financial surprises.

How to Pay Off Debt and Save at the Same Time

You should prioritize paying down as much of your debt as possible, while still making small contributions to your savings. As you pay down your debt, you can increase your savings contributions.

Using the 50-30-20 budget rule, you can allocate 50% of your after-tax income toward needs like housing and food, 30% toward wants like entertainment, and split the remaining 20% toward saving or paying down debt.

If you can cut back on your discretionary spending and put more money toward paying down your debt, you should. It can help you pay less interest over time and achieve greater financial independence sooner.

Determine What Type of Debt You Have

Some debt is worse (or more expensive) than others. Take a closer look at the type of debt you have to determine which debt you should pay back first. Debt typically falls into two categories:

Secured debt

With secured debt, there is a piece of collateral backing the loan. Common examples include car loans and mortgages. These debts typically have lower rates since it is “secured” by an asset like a car or a house, which your lender can repossess if you fail to make payments.

These loans typically feature fixed interest rates and installment payments, so whether you pay the debt down early or right on time, you’re still paying the same amount to borrow the money.

Unsecured debt

Unsecured loans are not backed by an asset. Instead, lenders let you borrow money based on your credit history and score. Personal loans, credit cards, and student loans are common types of unsecured debt.

Since there is no asset securing the loan, unsecured loans pose greater financial risks for lenders. As a result, unsecured debt features higher interest rates, meaning you pay more to borrow money.

Which Debt Should I Pay Down First?

Paying off the debt with the highest interest rates is a smart strategy. More often than not, this is unsecured debt from credit cards. Still, look at your statements to determine which debt has the highest interest rate.

Others choose to pay down debt using the “snowball method.” Here, you pay your smallest debt off first. Then, once that’s paid off, you roll the amounts from that payment into paying off your next smallest debt – gaining momentum to pay down your debts like a snowball rolling down a hill.

Regardless of which method you choose, pay the minimum due for all your debts each month. Failing to do so results in additional charges, like late fees, and negatively impacts your credit score. After paying the minimums on all bills, put your remaining funds toward the loan you’re paying off first.

Consolidating Debt

If you’re struggling to keep up with multiple payments, you can consolidate your debt into one convenient monthly payment. Not only does it make managing and paying down your debt easier, but many times you can get a debt consolidation loan at a lower rate than a credit card, which can save you money in the long run.

At FirstCapital Bank of Texas, our personal loans and lines allow you to consolidate debt with generous loan amounts at low rates with flexible terms that fit your budget. Contact us to see how we can help you pay down debt strategically while also planning for the future.

Looking for more ways to improve your financial fitness? Learn how to create a financial plan in 8 steps.