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So what does a financial back-up plan look like? Ideally, it means building a "nest egg" of savings, perhaps by automatically directing a portion of your paycheck to a bank savings account. This money-saving technique works because if you can't really "see" or "touch" the money, you learn to live without it, and your savings increase over time.
For many consumers struggling with debt, however, it's hard to create a financial cushion. So some people mistakenly use credit cards as their back-up plan or emergency fund - whether to pay for true emergencies or, just as likely, to fund daily expenses. But this unproductive way of spending is putting a lot of debt strain on consumers.
A February 2012 >poll by Bankrate.com supports this claim. It found that 25% of Americans now have more credit card debt than emergency savings. In addition, compared to one year ago, 27% of Americans report a lower level of financial security today and 38% are less comfortable with their savings now.
These statistics prove that our lack of savings for everyday expenses is the real problem and that the continued reliance on credit cards as our emergency fund perpetuates the cycle of unhealthy credit card use. Numbers from the Federal Reserve also support this thought: Americans' outstanding revolving debt, including credit card debt, continues to grow and topped $812 billion in January 2012.
It's critical that Americans work toward building an emergency fund based on good 'ole savings. It's possible even when your income isn't steady and even as you work to pay off old debts. Here's how:
Create a minimum budget: Spend less than the amount needed to cover bare expenses. Then, even in months when your income exceeds your expected salary (what a good problem that would be!), adhere to your original spending plan. Use our free budget planner to help calculate a budget, and start to stray away from it, click here for encouragement.
Pay recurring bills electronically: If your bank offers an online bill payment system, use it to pay routine, recurring expenses (e.g., telephone, water and electricity bills). You can set the date and amount to pay, and the payment will be deducted from your bank checking account automatically. This way, you won't ever forget to make a timely payment, meaning you will avoid late-payment fees. Just be sure to monitor your account balance closely to ensure you have enough money to pay your bills without overdrawing your account.
Start a savings routine: Automatically directing a portion of your income to a bank savings account is a good habit to get into. Savings will add up over time, even if you can only direct a small amount to the account. Also, look for an account that earns interest. The amount won't be high given today's economy, but any amount is better than zero. Click here for more advice about where to put your savings.
I understand that it's easy to pluck a credit card from your wallet to make a purchase, but if you don't have the savings to pay off that new debt, especially if it's not for a real emergency, perhaps you need to reconsider the purchase. That moment of hesitancy and questioning is an essential component to solving the debt puzzle for the majority of Americans, and could help solve your debt problems, too. Give it a try and let me know how you do.
Jenny Realo is the Chief Product Officer for CareOne Services, Inc. In our A Straight Talk on Debt blog, Jenny provides her insights and updates based on her 20+ years of experience in the financial service industry. Jenny is dedicated consumer advocate and places much of her focus on consumer protections in relation to creditor and industry regulatory changes.
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