One of the major reasons many people turn to credit cards is because they find themselves strapped for funds in times of desperate need. They try to solve their current financial crises by opening lines of credit, only to discover later that they have actually dug themselves deeper into debt than before.
Though the economy is slowly recovering, it is still weak — as your personal experience will probably tell you. As the Christmas season approaches, the New Year close on the horizon, it is a good time to start planning your finances so that you aren't forced into credit debt later.
The best way to avoid debt is to give yourself a financial buffer, an emergency fund that will see you through tight times and keep you from turning to credit cards. But in the down economy, it is all some people can do just to pay the bills on time and feed their families, much less save for an emergency fund.
Most financial planners will say that, to be safe, your emergency fund should equal around a year's worth of earnings. If you want to be financially prepared and want to avoid credit at all costs, but are unsure of how to start, here are a few tips to help you start saving for an emergency fund:
Take Baby Steps
An entire year's worth of earnings is quite a lot of money for anyone, no matter what you make. The important thing is not to be intimidated by the sum, and instead start with a much smaller goal — one month's earnings, for example — and then gradually increase that sum as you go. Remember that an emergency fund is supposed to set your mind at ease and not stress you further. Take it one baby step at a time, and you'll have more saved than you thought in no time flat.Direct Deposit
One of the best ways to start saving for an emergency fund is to automatically deposit a set amount from your paycheck every month (or every paycheck, preferably) to the fund, which you should keep in a savings account. Again, don't deposit so much that it puts an extra strain on you and your family; rather, put aside around $50 every check. $50 is a pretty small amount that you probably won't even miss once it's in a savings account. Monitor Your Spending
Even in hard times, we often find ourselves spending money on things we don't need to. For a week or two, keep a detailed account of all your expenses, and then analyze them at the end of the week to figure out where you could (or should) be scaling back. Once you identify problem areas, take the money that you would normally spend on those things and immediately put in the emergency account, before you spend it. Another thing to watch for is any money that comes your way unexpectedly. Usually when we get a tax break, a small inheritance, rebate, or any other kind of refund, we have a tendency to celebrate. Instead of blowing that cash, store it in the emergency fund right away.
Don't Ignore Debt
Just because you are building an emergency fund doesn't mean that you should postpone paying your credit card debt, if you have any. Make the minimum payments on your card every month to continue reducing the debt, while at the same time building up your emergency fund. It is important to remember that the debt won't disappear in an emergency, and will probably make things more difficult. So the more you can cut it down, the better.Invest
In addition to saving money in a basic savings account, you should also consider putting a larger amount into a CD account (three months' worth of earnings or more is the standard amount) so that you can increase the fund while it sits. Learning to save is challenging, but when disaster strikes, having an emergency fund can make or break your finances.
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