Having a sufficient emergency fund can give you financial peace of mind, but most Americans don’t have enough money in their retirement savings, a new survey said. (iStock)
At a time when record-high inflation is driving up consumer prices, an emergency fund can help you financially prepare for unexpected expenses like home repairs, auto maintenance and surprise medical bills.
Experts recommend that consumers should have enough emergency savings to cover up to six months’ worth of household expenses, but most Americans don’t have such a robust safety net, according to the 2022 TIAA Financial Wellness Survey.
While 78% of respondents said they have an emergency fund, just 45% said that it could cover six months’ worth of living expenses should they lose their job.
Without a sufficient emergency savings fund, consumers may turn to high-interest credit card debt to finance unexpected expenses. And amid soaring inflation, U.S. credit card balances are growing at a record pace, the Federal Reserve reports.
Keep reading to learn more about how to build your emergency savings and pay off debt accumulated due to unplanned expenses. You can visit Credible to compare rates on a variety of financial products, from high-yield savings accounts to debt consolidation loans.
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Tips for building an emergency fund
Having a robust emergency savings ensures that you won’t have to rely on credit card spending to cover unplanned expenses. It may seem daunting to grow your emergency savings fund if you’re starting from scratch, so follow these tips to get started:
- Make a budget to calculate your monthly expenses and savings goal.
- Determine how much money you need to cover up to six months of expenses.
- Dedicate extra money and cash windfalls like tax refunds to your emergency savings account.
- Set up Direct Deposit from your paycheck into a bank account.
- Open a high-yield savings account that builds your safety net with interest.
You can compare high-yield savings account rates and across multiple online banking institutions at once on Credible.
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3 ways to pay off debt due to unexpected expenses
Consumers may be tempted to turn to credit cards when faced with a financial emergency, but revolving credit card debt comes with high interest rates and expensive borrowing costs. If you’re looking for ways to pay off your credit card balances, consider these tactics:
Read more about each debt management strategy in the sections below.
1. Balance transfer credit cards
It may be possible to save money on your credit card debt by opening a balance transfer card with a lower interest rate. This allows you to move the balances of one or multiple credit cards onto a new credit card that offers more favorable repayment terms.
Keep in mind that you may be on the hook for a balance transfer fee worth up to 5% of the total amount, and there may be balance transfer limits.
Some credit card issuers offer balance transfer credit cards with an introductory 0% APR period lasting up to 21 months. However, these promotional offers are reserved for applicants with very good or excellent credit scores, defined by the FICO scoring model as 740 or higher.
You can visit Credible to compare balance transfer cards, some of which may offer a zero-interest introductory period.
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2. Debt consolidation loans
A debt consolidation loan is a type of unsecured personal loan that’s used to repay virtually any type of debt, from credit card balances to medical bills. Personal loans offer predictable monthly payments that you repay at a fixed interest rate over the course of several years.
Personal loan rates are currently at historic lows, according to the Fed. The interest rate you qualify for depends on your credit score and debt-to-income ratio, which is your monthly debt payments divided by your income. Applicants with good credit will receive the most favorable offers, while those with bad credit may see higher interest rates.
Most lenders let you prequalify to see your estimated interest rate with a soft credit check. This allows you to shop around for the best possible offer for your financial situation before you fill out a formal application.
You can compare debt consolidation loan rates on Credible for free without impacting your credit score. Then, use a personal loan calculator to estimate your monthly payments.
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3. Nonprofit credit counseling
If you’re looking for ways to repay debt, but you don’t have the credit score required to qualify for personal loans or balance transfer credit cards, then you might consider reaching out to a credit counseling agency. A certified credit counselor can help you create a budget, manage your debts and negotiate with your creditors on your behalf.
Depending on your financial situation, a credit counselor may enroll you in a debt management plan (DMP) to repay your debts in fixed monthly payments. DMPs typically come with a low monthly fee, which may be waived if you meet certain income thresholds.
There’s a full list of accredited credit counseling agencies on the Department of Justice website. You can also visit Credible to learn more about your alternative debt management options, such as credit card consolidation loans and balance transfer credit cards.
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