In a recent survey done shows that many Americans aren’t saving anything at all. A recent Bankrate survey found that 74 million Americans have more credit card debt than emergency savings. Credit card debt can be a real drag on trying to build up some emergency funds with interest rates averaging as high as 36% (First Premier Bank Credit Card).
A good rule of thumb is to try to set aside at least six months of living expenses that you can easily access in case of an emergency such as being laid off or a medical emergency.
First, you need to understand what good debt is and what is bad debt. Using credit to finance real estate, equipment used for a business or even a reasonable car would be considered good debt or necessary debt.
But using credit cards for almost everything else from shopping for clothes or that flat-screen television you just must have would be considered bad debt. These types of things should be only purchased using cash but only after you have a 6-month emergency fund set up.
So, to combat this you must have a plan to pay off bad debt such as credit card debt and at the same time set aside some funds to build up your emergency account.
So, come up with a 10-month plan by taking all your credit card debt and divide it by ten payments. If those payments are too high to cover each month then set a 12- month goal.
The point is that you will never be able to combat this bad debt by just paying the bare minimum payments which the credit card companies love.
You want to get into a rhythm of making these kinds of payments and then set aside as much as you can at the same time.
But what if there is nothing to set aside after each payment? That’s ok also since you’re still working toward a goal to get you where you want to be.
Once you’ve paid off all your bad credit card debt then you want to keep making the exact same payments but this time to yourself into savings account until you have six months of savings set aside. This should be easier since by now since you have disciplined yourself into setting aside a certain amount each month.
You always want to maintain this 6-month emergency fund and pretend you have no money if you ever get below 6-months of savings.