Consolidating debts while saving for an emergency fund may be challenging – but it is not an impossible task to accomplish. You just have to be willing to make a couple of sacrifices in order to accomplish both financial goals.
But the thing is, not everyone may be aware of how to do just that. Although they want to save and pay off your debt at the same time, they are not sure how to do it effectively. In fact, statistics reveal that Americans know more about borrowing (60%) than saving (56%).
Since it is already hard to save money while paying off debt at the same time, you can expect it to be more challenging if you have no idea what you should do. It will just add to the stress that you already feel because of the debt situation.
Fortunately, there are tips that you can follow to help you do both of these tasks. It may be hard but there are other people who have successfully saved money while paying off every single cent that they owe.
How to effectively save and consolidate at the same time
So how can you effectively save up for an emergency fund why consolidating debts at the same time? Here are some of the tips that can prove to be very useful in helping you get out of debt while giving your emergency savings boost.
Analyze your spending habits
According to research done by a financial institution, mindfulness may be the key to controlling your spending. The bank that initiated the research gave some customers saving challenges. Some just have to look at what they were spending on and it helped them save more. They only had to cut back on one or two purchases and they were able to save money.
If you want to save for an emergency fund and consolidate debt at the same time, you should increase the extra money that you have left after using your income to pay for basic necessities. That way, you have more cash to put into your savings without compromising the monthly debt payments that you have.
Keep your emergency fund separate
Another tip that you can use is to keep your emergency fund in a separate account. Here is a scenario that you might be able to relate with. You save up for an emergency fund. But since it is placed in an account where your other savings are, you might end up using it. When a real emergency happens, you might have less emergency money than you thought. This could force you to borrow money and add to your debt.
If you do not want that to happen, you should just set up a separate account solely for your emergency fund. That way, you will not be tempted to use it for something else.
Automate your savings
This will help you be consistent in saving up for your emergency fund. Sometimes, if you do not know that the money is being taken from your paycheck and into your savings account, the temptation to spend it goes down. You can just forget about the money and allow it to grow without you dipping your hand into it. When there is an emergency, you will be happy that you have that amount in your savings.
Use a strategy to pay your consolidated debt
Since you are saving for an emergency fund while consolidating debts, you need to use a strategy that will help you be successful. There are a couple of things that you can do. One, you can use debt management. The credit counselor that will work with you can guide you and make sure you do not miss a payment. Or you can also use refinancing to consolidate debt. Make sure it comes with a lower interest rate so you can save some money.
Do not feel bad if you can only pay the minimum amount of your consolidated debt. You can increase that amount in the future. You just have to spend a couple of months saving. Once you have enough emergency fund, you can put all your extra money towards your debt payments.
When to prioritize consolidating debts over saving
While an emergency fund is very important during debt relief, there are times when it is more important for you to pay your debts first.
The main reason is usually a higher interest rate. If you have too much high-interest rate debt like credit cards, it makes more sense to prioritize their payments over savings. This is especially true if the debt is already in collections.
However, if you really have nothing in your emergency fund, it also makes sense to start saving up for it little by little. Obviously, your priority will be paying more than the minimum of your debt payments but that does not mean you cannot save at the same time. Even if you can only put aside a small amount, that should not deter you from saving.
So how can you afford these small savings each month?
There are a couple of ways for you to do that. One is to negotiate for a lower rate as you are consolidating debts. This is actually one of the goals of debt consolidation so it is a must that you meet this requirement. Whatever you save because of the lower interest, you can put towards your emergency fund.
You can also set up a lower monthly payment on the consolidated debts. Just negotiate this with the lender. This will lengthen your repayment period but it will give you room in your budget to save up for an emergency at the same time.