You know you should build an emergency fund. But shouldn’t you focus on paying off debt, too? It’s a question many ask when it comes to establishing their financial well-being.

Money challenges can be inevitable—whether it’s a car repair, replacing a broken water heater, or losing a job. These are the times when having an emergency fund can make a huge difference. Knowing you have money saved for when you need it may help provide peace of mind and a sense of security.

On the other side of this question, debt can be a burden—and the less debt you have, the more at ease you may feel. Paying off debt can also free up cash flow—allowing you to put more of your money toward things that support your goals and your happiness.

Ultimately, building an emergency fund and paying off debt are both great things to do. Here, we’ll help you figure out how to tackle the priorities of saving at least $1,000 for emergencies and paying off high-interest debt. And from there, we’ll cover ways to keep the momentum going while working toward other long-term goals.

Establish a proper emergency fund.

"When you have a certain amount of money and it’s in a separate account only for emergencies, a tremendous amount of peace and confidence will come into your life and into those lives that you’re responsible for.” — Brian Ford, Head of Financial Wellness at Truist, on the podcast Money and Mindset With Bright and Brian.

Handle high-interest debt.

There are two common and relatively straightforward ways people approach paying down debt—the snowball method and the avalanche method. Both payoff strategies can be effective, so deciding which is right for you may come down to your specific goals or personal preference. 

Snowball method

This approach is great for people who thrive on small wins. The idea is to create a debt-payoff “snowball effect” by focusing on your smallest balances first. Paying off your smallest balance is the quickest way to free up monthly cash flow that you can use to make extra payments on your next-highest loan balance. Plus, the gratification of seeing a balance paid off may give you a mental boost that helps you stay focused on your goals.

Let’s say you want to pay off two credit cards and one auto loan, and you have $1,000 budgeted for debt payments each month. Here’s how the snowball method could work in this scenario.

After making all of your minimum payments ($450 total), you’ll have $550 left in your budget each month for debt payments. If you use that money to make an extra payment on credit card number one every month, you’ll have it paid off in two months. And then more cash will be freed up that you can use for making extra payments, growing your emergency savings, or both.

The bottom line: If growing your emergency fund is a top priority, the snowball method can help free up cash flow to help you make that happen. Note that since you’re carrying your larger balances longer, you may pay more in interest over time compared to other methods.

Avalanche method

If you’re more comfortable with the “slow and steady wins the race” concept, the avalanche method might be your speed. With this method, after making your minimum payments on all debts, you put the rest of your money (whatever you have budgeted or can afford) toward the debt that’s costing you the most in interest. After that’s paid off, you tackle the debt with the next-highest interest rate.

Here’s how it works:

1. Make a list of all your debts and note for each:
   • The total amount owed
   • The interest rate
   • The minimum payment required
   • How much you’re paying in interest
2. Rank them from whichever is costing you the most in interest to whichever is costing you the least.
3. Start working on your budget—and be sure to include the minimum payments for each of your debts.
4. Decide how much extra you can allocate each month to paying off the debt that’s costing you the most in interest. This is often the debt with the highest interest rate.

Because the debt costing you the most in interest may not be the smallest balance, it may take longer to fully pay off your first account compared to the snowball method. However, you’ll likely pay less in interest over time. And when you knock down that big balance, you’ll have some serious momentum.

The bottom line: If reducing the interest you’re paying is your priority, the avalanche method can help you accomplish that quicker than the snowball method. Since it won’t help you free up cash flow as quickly in the short term, though, you may need to adjust other items in your budget to grow your emergency fund simultaneously.

Debt consolidation

Applying for a new loan may be the farthest thing from your list of wants, but if you’re struggling to manage multiple debt payments or need to free up monthly cash flow so you can build an emergency fund, debt consolidation may be an effective approach. There are numerous ways to do so, including transferring balances to a new credit card or taking out a personal loan. The idea is the same, which is to use the new loan or line of credit to pay off as many existing debts as you can. Those loan balances are then combined into one new balance with a single interest rate, which ideally should be lower than the rates on your current loans.

The bottom line: If you have multiple high-interest debt payments that are difficult to manage, debt consolidation may help you lower your interest rates and reduce your monthly payments. You can then use the difference from those lower monthly payments to help grow your emergency fund. Before consolidating, be sure to review the terms of each of your loans. If you consolidate certain types of debt—like federal student loans—it’s possible that you may lose unique benefits.

Keep the momentum going.

Once you’ve hit those initial goals of saving $1,000 in an emergency fund and paying off your high-interest debt, take a moment to acknowledge your progress. This puts you in a great position to keep the momentum going! Here’s how:

• Redirect cash flow: If you’ve paid off one or more of your debts, you could consider taking some of the money you were putting toward monthly payments and using it to grow your savings more. If you have no- or low-interest debt, don’t feel bad paying just the minimum while you grow your emergency fund. Continue to automate savings deposits and debt payments, put any additional income you receive toward your savings or debt payments, and refine your budget as your monthly income or obligations change.
• Aim for the three- to six-month fund: Keep going until your cash savings hit that ambitious goal of having three to six months’ worth of living expenses saved. You can do it!
• Explore alternative savings vehicles: Even if you have a good APY on your high-interest savings accounts, you can optimize your savings returns further by looking into savings products like CDs (certificates of deposit) and money market accounts. These can sometimes yield a higher return on your cash—but keep in mind it may make withdrawing that cash trickier.
• Think about other long-term goals: Similar to your emergency savings, you can automate good money habits like investing and start small.

With the right debt payoff strategy and a budget that works for your situation, it can be possible to save for emergencies while paying down debt. Remember that even small amounts can add up to big progress over time.