Tough times happen without warning and are often costly. Many consumers are unprepared financially for an unexpected expense. One way to avoid credit card debt and bankruptcy, as a result, is to have an emergency fund saved.
A Federal Reserve Board survey of American consumers found that 46% of American consumers would be unable to cover an emergency cost of $400 or more without using some form of credit. Using credit for emergencies is a dangerous practice. Here are some saving tips and strategies that can help you start an emergency fund to save you from drowning in debt.
Emergency Fund Starter Tips
- Start Small – Know your budget and figure out a realistic amount to put aside. Whether you can put aside $10 a week or $10 a day, start with a number you can live with and still cover expenses. Make sure to include this new “expense” in your budget.
- Reduce Spending – Identify specific areas where you can cut back. Common ways include making all meals at home, turning off lights and AC whenever possible, and reducing or canceling your cable subscription. See ACCC’s Save by Cutting Back Guide for more tips.
- Generate Cash – Identify household items or clothes that you no longer need or use. Sell them to quickly boost your cash on hand. You can put that money directly into your emergency fund.
Now that you’ve generated momentum by starting to save more each month, implement some strategies to grow your emergency fund faster. This will limit the risk of credit problems due to emergency spending.
Emergency Fund Booster Strategies
- Set Achievable Milestones – Setting SMART goals will help build momentum. Start with trying to get to $100 set aside. Next, go for $500, and keep going with concrete target amounts until you’ve got enough to cover a few month’s worth of expenses.
- Make the Money Work for You – Shop around at local banks, credit unions, or online-only banks for an interest-earning account to store your emergency cash. This allows your emergency fund to grow on its own.
- Make it Automatic – Once your emergency fund is held in its own account, set up automatic transfers so you never forget to contribute. This will ensure steady growth of your fund. This will also help integrate this new saving task into your standard budgeting routine.
Dealing with credit card debt is easier when you’re protected from using more credit in a pinch. Putting even a little money in an emergency fund each month can better protect you from a financial pitfall.