One Way to Avoid Credit Card Debt: Have an Emergency Fund

Imagine for a moment that your car has broken down. You have to have it towed to a repair shop. The bill for towing doesn't bother you, because you have AAA. After the mechanic looks at your vehicle, however, he tells you that your car won't be safe to drive without major repairs. He estimates it will cost $875-$900 to repair your vehicle. You don't have that much money in your checking account.

Do you:

A. Take out a loan from a bank or a relative to pay to fix your car?
B. Use your trusted credit card?
C. Decide to walk to work every day, or ride with a co-worker?
D. Smile, because you can pay your car repair bill out of your emergency fund?

An emergency fund, as the name implies, is money you have set aside, probably in your savings account for emergencies, such as expensive car repairs. Financial experts recommend an emergency fund for emergencies you can't anticipate, such as car repairs, a broken appliance, or the loss of a job. Some experts say you should pay off your credit card and other debts before starting an emergency fund, while others suggest you pay off the debts and then start your fund. Many experts suggest you have an emergency fund that would replace 3-6 months of income, in case you need money in a hurry, and in so doing, you will eliminate one major reason for adding to your credit card debt.

Financial expert, Dave Ramsey, however, who gives financial seminars on paying off debt, budgeting, and wealth building, suggests a $1,000 emergency fund for those who earn $20,000 or more a year, $500, for those who earn less. He then suggests paying off debt, followed by then building your emergency fund to 3-6 months of income. Regardless, which advice you follow, it would seem Ramsey might be right, that with an emergency fund, whether it is $1,000 or more, one could use the funds to avoid credit card debt. That is one of the main reasons he suggests the emergency fund.

According to an article on the website, www.crown.org, a Christian financial ministries website, every family, no matter what its financial state should have an emergency fund set aside for unexpected expenses. According to the website, every family should set aside something, even if it can only afford $5 a week in savings. The article suggests an emergency fund equal to 3-6 months of family income in a place where the money can be withdrawn quickly without a penalty for early withdrawal. The article notes a variety of accounts in banks, for which one can earn a higher interest rate than for a regular account, and which require minimum deposits of $1,000-$2,500. Credit unions often offer the same accounts at a higher interest rate. Money market mutual funds offer a one to two percent higher interest rate than banks, sometimes with check writing privileges.

Another article, Ideas for Funding an Emergency Account, on the Crown site suggests that if you are living paycheck to paycheck you should track your spending for a month. Keep your receipts. Review everything you spend money on and look for ways to cut back. You never know what you might notice. Are you spending money for expensive gourmet coffee out that you could make at home and save money? Would it hurt to drink water with some meals, instead of soda pop? Do you need to buy a snack at work every day? Bring a snack from home. Bring your lunch to work, instead of eating out. Could you save money by buying generic or store brands for a lot of items, or using generics for your prescriptions? Could you save money by buying at discount stores? Could you read the news online, rather than subscribing to a daily paper? Could you downsize your cell phone or cable packages? Those are just some ideas of ways you might save money, and the savings could go into your emergency fund and help avoid adding to your credit card debt.

Ramsey, in his book, Financial Peace Revisited, and in his seminars suggests ways to earn extra money that can be used to pay off debt or for an emergency fund that can be used to avoid credit card debt. Is it possible to work overtime at your job? Some people believe they have enough unneeded items that they could provide the needed funds for a $1,000 emergency fund by selling on eBay. Some people earn extra money by delivering pizzas. Some earn money for their emergency fund through garage sales. Could you use money you make from writing for Associated Content, Constant Content, DailyArticle.com, Textbroker.com, Ecopywriters.com, or some other site for your emergency fund? There are a variety of other ways to make money online, through photography, on stock photo websites, through taking surveys, and others. It you would like doing demonstrations in stores, you might be able to get a job through www.narms.com. Any extra money you earn could go toward your emergency fund.

Regardless how you save up money or add new income for your emergency fund, such a fund can help you avoid credit card debt. However it's done, isn't that a good idea? There may be other reasons, as Americans, we add to our credit card debt, such as vacations, a new television, and others. At least if we have an emergency fund, we have taken care of part of the problem.

Citations: Types of Savings, by Crown Financial Ministries, Crown.org
Ideas for Funding an Emergency Account, by Crown Financial Ministries, Crown.org
Financial Peace Revisited, by Dave Ramsey, Lampo Press