The coronavirus has caused the finances of millions to take a hit. Over the past few months, as people have been laid off or furloughed, they have been turning more and more to their credit cards. Today, 47 percent of Americans carry credit card debt, and 40 percent of borrowers can only make the minimum payment, if that. That means their credit score is taking a hit, and they are paying much more for their debt than they should.
Although the situation may seem inevitable in times like these, there are ways to avoid overwhelming credit debt, in case an emergency strikes again. By creating an emergency fund now, you can prepare yourself for anything that may come up in the future.
Purpose of an Emergency Fund
As its name suggests, an emergency fund is intended to cover emergencies in which you need more cash flow. Common emergencies include unforeseen medical expenses, car repairs, repair or replacement of home appliances, and unemployment.
Regardless of the reason, emergency funds are important for times when you need a financial buffer and want to avoid credit cards and high-interest loans; many people who are in debt think they need to pay these first before starting their emergency fund. An emergency fund is especially important for people in debt because it can prevent them from taking out even more.
How Much to Save in an Emergency Fund
Of course, it is easy to think that you should put as much as possible into your emergency fund, so you can cover bigger emergencies or multiple emergencies. However, you also do not want to get into a situation in which you are putting too much into your fund, and then having to withdraw from it for daily expenses. Remember, you want to start your emergency fund and then not touch it.
A study has shown that the majority of Americans could not cover more than $1,000 in unexpected debt. So, is that enough to cover the cost of an emergency? While the answer to that depends on your own financial situation, the truth is that $1,000 is not enough for most people. According to experts, an emergency fund should be able to cover up to three to six months of expenses. This amount could help you cover daily expenses if you lost your job, which is the costliest emergency.
Stowing away three to six months of expenses sounds overwhelming to many people. It is important to focus on starting an emergency fund, and not how much is in there at the very beginning. Even $100 can help kickstart your fund, so you can grow it in the future.
How to Create an Emergency Fund
To work effectively, you should essentially plan your emergency fund ahead of time, before simply going to the bank and opening up an account. The following steps can help you plan and build your emergency fund.
- Determine how much you want to save: You can do this by calculating your expenses over three months. Begin there and if you reach that goal, you can continue building on it until you have enough to cover six months of expenses.
- Set a monthly goal: Setting a goal will help you create the habit of placing money into your emergency fund every month and make it seem more manageable. When setting this goal, determine how much you can actually afford to stow away every month, so you do not end up dipping into the account.
- Count the change: One way to save big without going broke is to place your change into a jar. When the jar is full, place all of that money into the emergency fund to give it a quick but substantial boost. For people who do not use cash, there are apps for your smartphone that take your change from debit/credit transactions and puts it into a savings account or invests it.
- Arrange for automatic transfers: It is easier to move money into your emergency fund if you never even see it. If you already receive your paycheck through direct deposit, your employer can likely break up your paycheck into separate checking and savings accounts. If you do not have a direct deposit set up, or your employer is unwilling to do it, you can set it up with your bank to transfer a portion of your paycheck to a savings account.
- Make use of your tax refund: Tax refunds are exciting to get and it is tempting to spend it on something nice for yourself, or even just use it to cover daily expenses. If you can, though, your refund can be a great addition to your emergency fund and the opportunity only comes along once a year. You can also set it up on your tax return to have any refund deposited directly into your emergency fund account.
Once you have your emergency fund plan established, you can then go to your financial institution of choice and create an account. Check-in on the fund regularly to determine if you are saving enough, or if you already have enough in the account, and adjust as necessary.
Also remember that when choosing the type of account you want to hold your emergency fund in, you should choose wisely. Emergencies happen quickly and so, you want to make sure you have access to the account when you need it. However, you also want to make sure that you choose a high-yield savings account. These accounts will help you accrue more interest, so you can build your emergency fund even faster.
Still Struggling with Debt? Our Fort Lauderdale Debt Defense Lawyers Can Help
Sometimes, emergency funds and trying to avoid using credit cards is not enough. If you are struggling with debt and a creditor or debt collector has taken legal action against you, it is important to know that there are defenses available. At Loan Lawyers, our Florida debt defense lawyers know how to use these and build a strong case to stop harassing phone calls, or even get your debt discharged. When you are facing a debt lawsuit, call us at (954) 523-4357 or contact us online to schedule a free consultation so we can review your case.
The dedicated bankruptcy attorneys at Loan Lawyers have:
- helped over 5,000 South Florida homeowners and consumers with their debt problems
- saved over 2,000 homes from foreclosure
- eliminated more than $100,000,000 in mortgage principal and consumer debt
- recovered over $10,000,000 on behalf of our clients due to bank, loan servicer, and debt collector violations.
Contact us for a free consultation and find out more about our money-back guarantee on credit card debt buyer lawsuits, and how we may be able to help you.