A little over a year ago, inflation peaked at a year-over-year increase of 9.1% in June 2022. Although it's down to a 3% year-over-year increase as of June 2023, inflation is still impeding Americans' abilities to balance saving and paying down outstanding debts.
That's according to a recent Bankrate study, which finds that 36% of American consumers have more credit card debt than emergency savings.
Emergency funds in general continue to be an area of concern for American consumers — more than half are uncomfortable with their level of emergency savings, Bankrate reports. And credit card debt may be the culprit, as Americans are currently shouldering more outstanding debt than in years past, Bankrate senior vice president and chief financial analyst Greg McBride tells CNBC Make It.
"We have seen credit card debt rising really ever since inflation started to exert pressure on household budgets in 2022," McBride says. This year's gap between savings and credit card debt (36%) is the highest in 13 years, up substantially from 22% in 2022, he adds.
On top of that, "Americans have been under-saving for emergencies for a long time."
If you're struggling to choose whether to focus on minimizing credit card debt or begin building up your emergency savings, McBride suggests aiming to balance both. "It is not either/or," he says. "You can and should work toward both simultaneously."
Here are four steps to get started.
1. Automate your savings
The best way to balance paying off debt while growing your savings is to automate your monthly contributions. Establishing a direct deposit system is incredibly important, McBride says.
"Successful saving is all about the habit. The easiest way to establish that habit is to take it out of your own hands and automate it," he says.
Regardless of whether you are working a full-time job or are a gig worker, you can automate transfers from your checking account to your savings account at the beginning of each month.
"If you wait until the end of the month after all the bills are paid and then try to save, too often there is nothing left over, especially if you're running credit card debt," McBride says. "Accomplish that saving right off the top."
Building a savings habit now can help keep you afloat later on. "By the time you have that debt paid off, your savings habit is well established and you've built up a bit of a buffer between you and credit card debt the next time around."
2. Pick a debt-repayment strategy
Once your savings are automated, pick a debt-repayment plan, McBride says. When tackling credit card debt, there are two well-known strategies you can use: the snowball method and the avalanche method.
For those with multiple debts, the snowball method encourages consumers to start by paying off their smallest debts first, regardless of interest rate, to build momentum. Then, you can work your way up to paying off your larger debts.
The avalanche method, on the other hand, suggests prioritizing debts with the highest interest rates first. Start by putting any extra funds toward the balance with the highest rate, in addition to covering the minimum on each debt. After that's paid off, move on to the second-highest balance until you eventually pay off everything.
Regardless of which method you chose, it is important to pick a plan and stick to it, McBride says. Ultimately, "at the household level, it is critically important to get that debt paid down as quickly as possible, particularly at a time when credit card rates have never been higher."
3. Take advantage of balance transfer offers
One of the best ways to lessen the load when it comes to paying off your credit cards is by taking advantage of balance transfer cards, McBride says.
These cards allow consumers to move their debt from a card with a high annual percentage rate to one with a short-term 0% APR period. The 0% APR period can last up to 21 months, giving you several interest-free months to pay down your debts.
"Balance transfer offers can really be a big help," McBride says. "Not only can they shield you from interest charges for an extended period of time, but they can allow you to make significant headway on getting that debt paid down," even if you aren't able to transfer all of your balances.
But be sure to pay off any debt you transfer to the new card within the 0% interest period, McBride says. "When that promotional rate expires, the rate jumps significantly higher and you are right back in the position you were in."
For more, check out this list of the best balance transfer cards from CNBC Select.
4. Look for ways to grow your income and maximize your budget
As you pay down debts and grow your savings, it can be helpful to bring in extra money if you can.
"If you are spending more than you are bringing in, debt is what is making up the difference," McBride says. "That is not a good path, nor is it sustainable."
In addition to budgeting, taking on a second job, whether it be a side hustle or gig work, may allow consumers more room within their household budgets.
"Inflation has really stretched household budgets. It is not just about cutting expenses, but about boosting income, even just temporarily, to be applied to credit card debt," McBride says.
"What you can squeeze out of your budget is money you can be putting towards that debt. It doesn't have to be permanent; it is a means to an end until you can get your debt paid off," he adds.
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