How much should you save when you’re in debt? This is one of the most common questions people have as they try to pay off debt and improve their finances.
You may see other people around you saving money like crazy. I’ll never forget an article I read when I was aggressively paying down my debt. It was about the author having too much money saved in an emergency fund. Several people commented that they had over-saved too and were considering what to do with the excess money. I thought to myself: ‘what an excellent problem to have’.
Realize that everyone’s financial situation is different so don’t waste time comparing yourself to someone else’s journey. One thing you can do, however, is utilize these tips to help determine how much you should save when you’re in debt.
Consider the Type of Debt You Have
The type of debt you have can directly impact how soon you want to pay it off. For example, if you have high-interest credit card debt, you will save more money by paying it off as soon as you can.
Paying off debt often gives you guaranteed savings because it reduces the amount of interest you pay. When I was eager to pay down my high-interest car loan, I set aside a small amount of savings and put more toward the loan balance.
I was able to pay off my 60-month car loan in just 18 months. Doing this saved me thousands of dollars so even if you’re not loading up your emergency fund during debt payoff, paying off high-interest debt will still save you money.
Decide How Long It Will Take To Pay Off Your Debt
Still, trying to figure out how much should you save when you’re in debt? Narrowing down your timeline for paying off debt is important. If you have low-interest student loan debt, you may opt to take a slower repayment approach.
If you’re going to be on a longer debt repayment journey, it’s important to understand that you may need to have a higher savings cushion. Unexpected expenses pop up all the time and they can definitely delay your debt repayment process. If you save too little, you run the risk of getting deeper into debt to pay for unexpected expenses.
This is why so many people get stuck in a cycle of debt. They often get on a strict plan and make some progress with debt payoff, then find that expenses increase but they have no savings to help. This results in having to use a credit card or get a loan and the process starts all over again.
How Many Liabilities Do You Have?
I’m not only talking about your different types of debt here. Think about other potential liabilities that may require extra money from you. Things like home repairs, car maintenance, healthcare bills, and other large but necessary purchases.
In general, homeowners should have a decent amount of money saved whether they have debt or not. There is too much that can go wrong when you own a home. Just in under two years of buying our home, my husband and I found that we needed a new furnace, some plumbing issues fixed, and also $1,800 for some foundation work.
Ideally, you’d want to pay off most of your consumer debt before buying a home which is what we did. Still, it’s important to have some money saved as a homeowner. A small amount like $1,000 probably isn’t going to work.
Consider Your Overall Financial Situation
Piggybacking off assessing your number of liabilities, it’s important to assess your entire financial situation. Each person’s situation is unique so don’t try to go off what someone else is doing during their debt repayment journey. Consider factors that may affect how much you should save like:
- If you have kids
- Whether you rent or own a home
- How much debt you have overall
- Which relief options are available for your debt
- Whether you are paying off debt solo or with a partner
- How much you currently have set aside
Define Your Own Baby Emergency Fund Amount
Now it’s time to determine how much to save by defining your own baby emergency fund amount. Dave Ramsey is a financial guru who recommends setting aside $1,000 in a baby emergency fund then throwing everything else toward debt.
Many people have argued that this amount is not enough and would barely provide any relief during a true emergency or unexpected event. For example, a simple emergency room visit could cost $3,000+ depending on your insurance or even more if you’re uninsured.
What I recommend is that you define your own baby emergency fund amount so that it’s realistic for your situation and makes you feel comfortable as you pay down debt.
Here’s an example of what I did:
In 2015, I got serious about paying down my debt. I had $30,000 of debt at that time between a high-interest car loan and student loans. My plan was to pay if off ASAP.
Some factors that helped determine how much I should save while paying off debt included:
- Being a single mom at the time
- My ability to keep my cost of living low at the time (by getting on a budget and being frugal)
- Being a renter and having lower housing expenses
- Establishing a few side hustles and additional streams of income
- Wanting to pay off my high-interest debt FAST to save money in interest
Ultimately I decided to save $2,500 in a baby emergency fund as I was aggressively paying down my debt.
While I was a single mom at the time, it gave me comfort to know that I had a solid budget and my living expenses were low. I was renting so I didn’t have to worry about home repairs and utilities like gas and garbage were included in my rent.
I also had just bought my car in 2014 so it didn’t need too many repairs at the moment. At this time, I also had a stable job with a steady paycheck and I was starting to explore side hustles. This meant I could probably cash flow smaller unexpected expenses without it affecting debt repayment too much.
At the time, saving $2,500 and throwing the rest of my money toward debt seemed like a solid plan. If I had more kids or more expenses and potential liabilities at the time, I would have considered saving more.
Summary: How Much Should You Save When You’re In Debt?
How much you save when you’re in debt is totally up to you but you want to save a realistic amount. Consider the factors mentioned above and an amount that you’d feel comfortable with when paying off debt. Don’t compare yourself to others since everyone’s situation is unique.