Credit card debt in America was at an all-time high even before the outbreak of the coronavirus virus.Â Record $ 930 billion in Q4 2019.
Conventional wisdom advises configuring De Debt… that you should pay your balance each month. However, as there is the possibility of an economic downturn, many Americans may need to make only the minimum payments to their credit cards to be able to spend any discretionary income on urgent bills and an emergency savings account.
Experts recommend that you have an emergency fund to cover three to six months’ worth of expenses in case of a sudden job loss, medical emergency, or any other unanticipated event.Â How can you save money in an emergency if you are already in credit card debt?
CNBC Select spoke with two experts below to help you decide the best strategies for paying down debt and saving money. Also, find out how an emergency fund can provide peace of mind in stressful situations.
It is crucial to make an emergency savings plan now
CNBC Select says that the current economic climate is “proof of how important it is to have an emergency fund”, Leslie H. Tayne (lawyer specializing in debt relief, founder of Tayne Law Group), states.
“If you don’t have any emergency funds, you should start to create one as soon as possible.”
It will vary depending on how much of your income has been affected by the crisis.Â For all income levels, it is a good time for you to save money overall.
Tayne suggests that you set aside some money if you are still making money.
Tayne says that even if you don’t make that much, your goal should be to “get through this difficult time”.Â You could use a 0% APR credit cards with a promotional funding period of up to 21 months to help you pay your ongoing expenses and seek additional income.Â Citi Simplicity(r), for example, offers 0% APR on purchases and balance transfers for the first 18 month (after 14.74%-24.74% variable; balance transfer must be completed within four months).
A new credit card is only temporary and can be used to help you get stability. However, you should also make an effort to lower your monthly expenses and replace lost income with unemployment benefits or a new job.Â It is important to make paying off debt a priority, even though it may take longer than you expected. Also, look for ways that you can save money wherever possible.
Tayne says, “Be honest in your budget review – identify what’s a need’ and what’s a?want”.Â You may be able cut some expenses to make more money for an emergency fund.
Which should you first focus on: Saving or paying off your debt?
Although it may seem counterintuitive at first, the best place to begin when you are trying to get rid of debt is with a savings bank, says Dan Ariely (behavioral economist and author, “Dollars and Sense”, and “Payoff”.
Ariely stated that saving for a rainy-day helps people show themselves they can accomplish a goal and gives them the confidence to manage their finances differently.” Ariely spoke to CNBC Select.
Ariely recommends that you set up a small savings account with at least $500 if your cash situation isn’t good enough to cover six months’ worth of expenses. If you are supporting a family, you should aim for $ 500 per member.Â .Â Experts recommend that you save at least $1,000 before taking on heavy debt.
To protect your credit rating, you must continue to make your minimum monthly payments while saving.
After you reach $ 500, you can start paying your credit card debt every month.Â After you have met your basic needs, you can calculate how much you can afford to spend more.Â As soon as possible, pay your bills as soon as you receive them.Â To make sure you never miss a payment, you can set up automatic payments.
According to Ariely, you should save 5% every time you pay your credit cards bill.Â If you pay $ 650 each month on your credit card bill, try to save at least $ 32.50.Â You’ll save almost $ 200 over the first $ 500, bringing your savings account to nearly $ 700. In six months you will have paid off $ 3,900 of debt (not including interest) in just six months.
You can slowly increase your monthly savings as your economic situation improves.Â It is important to accept it.
To get out of debt, you can use a balance transfer credit
Transferring existing debt to a balance transfer credit card like the Wings Visa Platinum Card is another way to get rid of debt.Â The card offers 0% interest for the first 12 months, then 8.15% to 18.00% variable annual percentage rate.Â A deadline can motivate you to pay your debt off faster than you expected.
Ariely explained that there is a risk when you get a credit card with 0% APR. “But the danger with those credit cards is that they start with great terms, and then the terms become really difficult down the line.”
You should be familiar with how 0% APR credit cards work.Â Each balance transfer credit card has its own terms, agreements, fees.Â Most cards have a balance transfer fee of between 2% and 5% that you should factor in to your budget.
The savings are undisputed: With a card such as the Aspire Platinum Mastercardr, which has a 2.2% balance transfer fee (after a variable APR from 8.15% to 18.00%) and no interest for six billing cycles, you can pay off $ 3,000 in six months with $ 500 per month.Â The $ 60 Balance Transfer Fee would be your only cost.
However, if you had $ 3,000 in debt and a variable APR (of 25.24%), it would take you seven more months to repay your debt. You would also pay $ 241 additional interest.
Instead of paying $ 500 more and spending $ 241 more on interest, you can use the savings to open a high-interest savings account that allows you to earn 1.5% – 2% interest each year.Â You can continue to add to your savings account even after you have paid off the debt in six months.
Ariely recommends that you “read the terms and have enough money to pay your debt when necessary.”Â You will then be charged interest once again after the promotional funding period has ended.
How to choose an emergency savings account
Tayne stated that it is a good idea to save money in an account that earns interest.Â By doing this, your money will grow by simply staying in the account. The more money you have, the faster it will grow.
In an emergency situation, however, you should consider how quickly you can access your money.
Tayne says that accounts with the highest interest rates often have the longest time it takes to withdraw your money.Â Before signing up, consider whether the timeline for getting your cash is important.
How to remain motivated even when you are paying off your debt
Although debt repayment is a good thing once you have reached your goal, it can be hard to keep going.
Ariely says that debt repayment is invisible.Â Your family members will be grateful if you buy food for your family as well as toys for your kids.Â It’s good for you and your family.
“Paying off debt is not an easy task.Â He says that no one can see or appreciate it.Â It must be concrete.
How can you make the invisible visible?
Ariely says that one way to do it is to hang a painting in your kitchen or public area.Â “I would not put numbers but I would place a bar showing your total debt as an entire family and then show each step to show how much you have paid off.”
Ariely explained to CNBC Select that it’s beneficial for both parents and children, who sometimes don’t see the many ways they are being taken care of in different ways.
“The best thing that we can do for our families is to let them know that we are paying down our debts. In doing so, we are taking good care of our families.”