If you're like many people, you've probably asked yourself the classic question: should I save money. pay off debt first or work on both at the same time? You’re in the right place because I’ve got a strategy that balances both and can set you up for financial success.

What do I recommend to my clients (and anyone else who will listen)? Start by working on a small emergency fund while paying minimums on your debts, and then aggressively tackle your debt. And yes, there’s a method to this madness that can help you avoid financial stress in the long run.

TL:DR - in case you aren’t up for much reading today!

Build a Small Emergency Fund First: Aim for an amount that would help you cover any unexpected expenses that you can think of. Typically $1,000 to $3,000 is a good range but it varies for each individual.

Pay Minimums on Debt While Working on the First Step: This keeps your accounts in good standing and avoids penalties.

Then Aggressively Pay Off Debt: Once you hit your savings goal, pivot to putting as much as you can on your debts. It is best to focus on minimum payments on everything and extra payments on one focused debt.

Stop Adding to Debt: Do everything you can to add to your debt. Cut up credit cards, use cash or debit, and stick to your budget (or build one if you don’t have one yet).

Balance Saving and Debt Repayment: If you have to use any of your savings for a financial curve ball, pause any extra debt payments to rebuild your savings.

The Emergency Fund: Your Financial Safety Net

Before you start throwing every spare dollar at your debt, it’s crucial to have a small emergency fund. Think of it as your financial safety net—your cushion against life’s inevitable curveballs. An emergency fund is essential because it helps you avoid getting further into debt when unexpected expenses arise.

Why an Emergency Fund First?

1. Unexpected Expenses: Life is full of surprises, and not all of them are pleasant. Car repairs, medical bills, or a sudden job loss can derail your finances if you’re not prepared. Having a small stash of cash can help cover these emergencies without resorting to credit cards or loans.

2. Peace of Mind: Knowing you have a financial buffer can reduce stress and anxiety. It gives you a sense of security and control over your finances.

3. Breaking the Debt Cycle: Without an emergency fund, you're more likely to rely on credit cards or loans when things go wrong. This creates a vicious cycle of debt that’s hard to break. With an emergency fund, and not adding more debt, you can see your debts trending down and this can be a big motivator.

Building Your Emergency Fund

Steps to Build Your Emergency Fund:

1. Set a Goal: Determine how much you need. Start with $1,000 as your initial target.

2. Budget: Review your budget and find areas where you can cut back temporarily. This could mean dining out less, cancelling subscriptions, or selling items you no longer need. Need a little help, grab my free budget tool.

3. Automate Savings: Set up automatic transfers to your savings account. Even small, regular contributions add up over time.

4. Extra Income: Consider side gigs or selling items online to boost your savings. Every little bit helps.

Minimum Debt Payments: Keep your credit in good standing

While you’re building your emergency fund, make sure you’re at least paying the minimums on your debts. This keeps your accounts in good standing and avoids late fees, penalties, and hits to your credit score.

The Next Step: Aggressively Paying Off Debt

Once your emergency fund is in place, it’s time to shift your focus to paying off debt. Here's why this step is crucial:

1. Interest Rates: High-interest debt, like credit card balances, can quickly spiral out of control. Paying it off reduces the amount you’re losing to interest each month.

2. Financial Freedom: Reducing debt frees up income for other goals, such as saving for a house, investing, or enjoying life more.

3. Credit Score: Lower debt levels can improve your credit score, which can lead to better interest rates on loans and credit cards in the future.

How to Pay Off Debt Effectively

There are several strategies for paying off debt, but here are two of the most popular ones:

1. Debt Snowball Method:

   • List your debts from smallest to largest balance.

   • Pay the minimum on all debts except the smallest.

   • Throw as much extra money as possible at the smallest debt until it’s gone.

   • Once the smallest debt is paid off, move to the next smallest, adding the amount you were paying on the first debt to this one.

   The debt snowball method gives you quick wins that can boost your motivation.

2. Debt Avalanche Method:

   • List your debts from highest to lowest interest rate.

   • Pay the minimum on all debts except the one with the highest interest rate.

   • Throw as much extra money as possible at the debt with the highest interest rate until it’s gone.

   • Once the highest-interest debt is paid off, move to the next highest, adding the amount you were paying on the first debt to this one.

   The debt avalanche method saves you more money in interest over time.

Stopping the Debt Cycle

One of the keys to making this strategy work is to stop adding to your debt. Here’s how to do it:

1. Credit Card Cuts: If you find yourself frequently tempted to use credit cards, consider cutting them up or freezing them (literally, in a block of ice). Removing the temptation can help you break the habit. If you do want to continue to use credit for points or cashback, commit to paying any new charges off immediately so you see your debt continue to trend down.

2. Use Cash or Debit: Switch to using cash or a debit card for everyday purchases. This way, you’re only spending money you already have.

3. Budgeting: Stick to your budget. Track your spending and make adjustments as needed to stay within your means.

4. Emergency Fund: Remember that emergency fund you built? Use it for true emergencies instead of reaching for a credit card.

Balancing Saving and Debt Repayment

As you focus on paying off debt, you might wonder if you should also continue to save. The answer is yes but with a twist. While aggressively paying down debt, it’s still important to save for the future. Here’s how to balance both:

1. Employer Matching: If your employer offers a retirement plan match (like an RRSP or 401(k) match), contribute enough to get the full match. It’s essentially free money.

2. Small Savings Goals: Continue to save small amounts for short-term goals or upcoming expenses. This prevents you from having to dip into your emergency fund or use credit cards for planned expenses.

Conclusion: Your Roadmap to Financial Stability

The question of whether to save or pay off debt first doesn’t have a one-size-fits-all answer. However, starting with a small emergency fund while paying minimums on your debt and then shifting to aggressive debt repayment strikes a good balance. This strategy helps you handle unexpected expenses without going further into debt and keeps your financial journey on track.

Remember, the goal is to make steady progress, and don’t forget to celebrate your wins, no matter how small, and keep moving forward. Managing money, especially with ADHD, is all about finding the strategies that work best for you and sticking with them. You’ve got this!