How To Build A Savings Account When You Feel Like You're Drowning In Debt

The shocking reality of 2022 is that Americans collectively carry an astounding $925 billion in credit card debt, as reported by Lending Tree. In the past year alone, this figure has risen by 15%. While people try to balance this debt with rising interest rates combined with their other bills and living expenses, experts recommend keeping an emergency fund at all times. This fund should hold at least enough money to cover 3 to 6 months' worth of all household expenses, according to Wells Fargo.


Is it more important to pay down the debt or to build a savings account for emergencies? The good news is that you don't have to choose; it is possible to do both. The bad news is that doing both can require making some challenging changes to your lifestyle, if you aren't used to limiting or monitoring your spending. Here's what you need to know about paying off your debt and building your savings account at the same time. 

Calculate your savings goal

Without an emergency fund, you're likely to take on even more debt when unexpected expenses pop up, as detailed by the Consumer Financial Protection Bureau. If your goal is to create an emergency fund, you'll want to add up the total of every bill and living expense you cover each month. Start with the bills that cost the same amount every month, like your rent, mortgage payment, phone bill, and car insurance. For bills that change on a month-to-month basis, you can use an average of the past year or 6 months of bills. Don't forget expenses that don't arrive in bill form, like groceries, personal care items, gifts, and recreation (via Quicken).


Once you have a grand total of how much your expenses cost each month, multiply that number by three for your first savings goal. For example, if your monthly expenses add up to $4,500, then your goal is to save $13,500. If your expenses add up to $6,000 a month, your savings goal is $18,000, and if your monthly expenses are $2,500, your savings goal is $7,500. These numbers might seem unattainable at first, but with the right habits in place, you can get there. Once you're able to maintain this amount in your savings account for an extended period, up your goal to 6 months' worth of expenses. 

Assess your debt

Not all debt is created equal. Examine each credit card account and make a note of the balance, the interest rate (APR), and any fees associated with the account (via Investopedia). This information can typically be found by signing into your account on the card provider's website. Unless you have a card with a low enough balance that it makes sense to pay it off in full, you'll want to prioritize paying down the cards with the highest interest rates and the most fees first. This is the debt that is costing you the most to hold.


If a credit card holds a balance of $3,000 and has an APR of 18% and you make $60 monthly payments for 91 months, you will pay $1,526 in interest. If the same card has an APR of 29% and you make the same payment for the same amount of time, you'll pay $6,608 in interest (via Discover). Paying off cards with higher interest rates sooner can literally save you thousands of dollars. 

Create a budget

The detailed list of monthly expenses you made when you calculated your savings goal will also come in handy for creating a budget. Add together all of your monthly income. This should include wages from your job and the job of anyone you share your bank account with, earnings from side work, tips, child support, and any other sources of income (via MintLife Blog). If the amount of income available changes each month, use an average of the past 6 to 12 months.


Once you know how much money is coming in, subtract your total monthly expenses from your total monthly income. What is left is how much is currently available to put towards paying off more debt and building up a savings account. Don't panic if the number is small or even negative. That's what a budget is for. One of the best budgeting methods, especially if you're prone to overspending, is zero-based budgeting, as explained by NerdWallet. The system entails giving every single dollar of your income a job and tracking expenses to ensure there is no deviation. 

Cut expenses

An unavoidable part of assessing your finances to create a budget and a plan for paying back debt while growing savings is figuring out which expenses can be cut out or reduced. This doesn't have to be painful. Start with the smallest sacrifices by reviewing all your subscription services to make sure you aren't paying for even one subscription that you aren't using. Next, take a look at your spending on eating out, ordering in, and excessive fashion or beauty purchases. Setting hard limits in these areas within your budget can help.


While many expenses can't be cut completely, this doesn't mean they don't warrant evaluation. Could you drop down a tier in your cable, internet, or streaming package? If you call and discuss your concerns with your cell phone provider, can you get yourself a discount on your bill? You might be surprised by the programs certain providers will offer if it looks like their only other option is losing a customer (via Money Management International). 

Consider a side hustle

Should you have to work more than your full-time job to afford to live comfortably? No. Is that the reality for up to 50% Americans anyway? Unfortunately, yes, according to Bloomberg. Before you start searching for side work, take the time to conduct an honest assessment of your energy level and your physical and mental health. Are you already experiencing burnout, or are you on the verge? Don't put more on your plate. You can find other ways to make your budget work.


If you feel like you have a little extra energy left after working your normal job, taking up a side hustle can provide extra money that can go straight into your savings account or towards paying off your debt. The easiest way to choose side work is to branch off from what you already do for a living. If you're an English teacher, for example, consider freelance tutoring or writing on the side. Other lucrative options include dog walking, pet sitting, and delivering food.