Is Your Credit Card Your Emergency Fund? Here’s How To Curb Debt and Build an Actual Emergency Fund
Credit cards can be convenient to use, but often don’t serve as the best emergency fund. If you have an unexpected expense and you need to buy something, you can easily swipe your credit card. But if you don’t pay off the balance at the end of the month, you will quickly wind up in debt.
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A survey conducted by the Federal Reserve Bank of St. Louis found that the average U.S. household holds credit card debt of $7,226 — and that mostly middle class families were overusing credit cards for purchases. Since interest rates rose to 21% in 2023, this means those households are paying an average of $126 in credit card interest alone.
Instead of using your credit card for emergencies, you can take steps to pay down that debt and build an emergency fund as a cushion against life’s unexpected events.
Make a Firm Decision
A true emergency fund means having enough savings to cover unforeseen expenses without turning to credit. This requires a firm decision to stop using credit cards as your safety net. It may be challenging at first, but remind yourself that this is a step towards financial stability and reducing stress in the long run.
Halting your credit card usage, even if it’s only temporary, will help you get a better handle on the debt you do have — and stop accumulating more.
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Assess Your Budget
Develop a realistic budget that accounts for your income, necessary expenses and savings goals. Track your spending to identify areas where you can cut back. Tools like budgeting apps or spreadsheets can be incredibly helpful in maintaining this discipline.
The goal is to free up some money to put toward debt reduction and emergency savings. Choose which one you want to prioritize — or you can split the budget 50/50.
For example, if you adjust your budget and have $300 left over each month, $150 can go toward an extra credit card payment and the other $150 can go toward building your emergency fund.
Set a Savings Goal and Break It Down
Decide how much you want to save for your emergency fund. A good rule of thumb is to aim for three to six months’ worth of living expenses. However, starting with a smaller, more attainable goal (like a $1,000 emergency fund) can help build momentum and confidence.
Consider starting with a modest emergency fund of $1,000 to $2,000, then allocating the rest of your money toward debt reduction. Once you’ve paid off the debt, you can redirect that extra money toward building your emergency fund further.
Explore Additional Income Sources
Increasing your income is another effective way to build your emergency fund faster, especially if your budget is already tight. Consider taking on a side hustle, freelancing, or selling unwanted items to generate extra income. This can also help you pay off existing debts more quickly.
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This article originally appeared on GOBankingRates.com: Is Your Credit Card Your Emergency Fund? Here’s How To Curb Debt and Build an Actual Emergency Fund
