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Steve Bucci, the Bankrate.com Debt AdviserHow to save for an emergency fund

Dear Debt Adviser,
I am able to pay all my bills on time but I am not able to save. I have two car payments and three credit cards. One I pay $350 and the other two approximately $250 each. Would it be better to consolidate? I owe about $20,000 on my house. One of the cards is about $1,500. The other one is about $700 and I owe $5,000 on my third card. I need help.
-- Betty

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Dear Betty,
Your credit card debt at approximately $7,200 is not a great situation but you do not seem to have any problems making payments, which is good. You are paying $850 per month to bring these balances down. Depending on the rate of interest you are being charged, and assuming you are not charging more on these cards and continue paying the same amount each month; you should be able to pay off the balances in approximately one year.

You may save a small amount of money in interest charges by consolidating your credit card debt; however, I believe you are doing fine paying off the balances as you are. Rather than see you spread out the $7,200 further into the future, I'd rather see you get rid of it. The true test will come when you have paid off your credit card balances and do not need to make the $850 in payments. What will you do with that money?

Those who read my column on a regular basis may have noticed that I mention the importance of an emergency savings cushion -- three to six months of living expenses -- as often as I can. My recommendation to you is to pay off your credit cards, without adding any additional charges to the cards, and then begin putting money aside for your emergency savings cushion.

I will admit that motivating yourself to save money that will sit in a savings account earning very little interest to pay for unexpected life events like a layoff or major medical bill is difficult. It is much easier to save money for an immediate goal like a new sofa, summer vacation or the latest fashions. In theory, most people will admit that a savings cushion is a good idea, however, in practice it is often overlooked.

The following are some motivational ideas and ways to put money aside for an emergency savings cushion.

  • Consider your monthly savings amount as a bill that has to be paid. You may consider having the amount transferred automatically from your checking account or paycheck. Keep in mind that the "bill" you are paying will help you pay unexpected bills when you have no other income to cover them and keep you from going into debt.
  • Even a small amount will add up in time. Like you, many people believe they do not have any room to set aside money for savings. However, depending on the size of your family, skipping a meal out each week could result in a $160 per month savings deposit. That's $1,920 a year after taxes!! Take a good look at your spending habits, and I bet you can find $150 or so each month in extras that you could do without, at least for a while, to build up savings.

The next time you get a raise at work or a tax refund, considering directing half to savings. If you're not used to the money, you won't miss it. This is one of the easiest, most painless ways of saving that I know of.

  • When you pay off a car note or other loan, consider making half of the payment to yourself and put it into your emergency savings account. You will not miss the money if it is put into savings, but you will find a way to spend it if it remains in your checking account.
  • Involve the whole family. Even the youngest child can contribute change to the savings goal. It is easier for children to get involved if they understand why they must give up pizza night or at least cut down the number of toppings. Also, you are setting a good financial example for your children.
  • Plan a treat for you, your family or both when you reach your emergency savings goal. Make it something everyone will look forward to, but not something very expensive. Some of my favorites are a day at the zoo or a day trip to the seashore. The important thing is to mark the occasion and congratulate yourself and all those who helped! We all need to feel successful and not just on an endless treadmill. Declare victory!

The Debt Adviser, Steve Bucci, is the president of Money Management International Financial Education Foundation and the author of Credit Repair Kit for Dummies. Visit MMI for additional debt advice or click here to ask a debt question.

Bankrate.com's corrections policy -- Posted: Aug. 15, 2003
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