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How to save for an emergency if you already have credit card debt

Select spoke with two experts to help you figure out how to build an emergency savings while also paying down your credit card debt.

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Even before the coronavirus pandemic wreaked havoc on the U.S. economy, credit card debt in the U.S. hit a record high of $930 billion in the last quarter of 2019.

Conventional wisdom says to pay off your balance every month, but as we face the possibility of an economic recession, many Americans might have to consider making only the minimum payments on their credit cards so they can put all leftover discretionary income toward other pressing bills as well as an emergency savings account.

Most experts suggest having an emergency fund to cover about three to six months' worth of expenses to prepare for a medical emergency, sudden job loss or another unexpected event. But how do you save for an emergency when you're already in credit card debt?

Below, Select spoke with two experts to help you figure out the best strategies for saving and paying down debt at the same time and how an emergency fund can bring you peace of mind during the most stressful of times.

Now is a crucial time to have an emergency savings plan

The current economic situation is "proof of how important having an emergency fund truly is," Leslie H. Tayne, a debt-relief attorney and founder of Tayne Law Group, tells Select.

"If you didn't have an emergency fund before, this situation should certainly encourage you to start building one as soon as you can."

This will look different for every individual depending on whether your income has already been affected by the crisis. But for all income levels, now is a good time to spend less overall.

"If you're still earning money during this time," says Tayne, "consider putting some of your excess away now."

And if you're not earning as much, "your focus should be on making it through this difficult time," explains Tayne. That could mean using a 0% APR credit card with a promotional financing period to give you more time to pay off everyday expenses while you look for additional income. One example is the Citi Simplicity® Card that offers 0% intro APR for 12 months on purchases from date of account opening and 21 months on balance transfers from date of first transfer (after, 18.99% - 29.74% variable APR; balance transfers must be completed within four months of account opening). There is an introductory balance transfer fee of 3% or $5, whichever is greater for transfers completed within the first 4 months of account opening. After that, your fee will be 5% of each transfer (minimum $5).

But a new credit card is a temporary step toward stability; you should only do it if you also make an effort to reduce your monthly expenses and replace any lost income with unemployment pay or a new gig. You should also make debt payoff a priority, even if it takes longer than you expected, as well as look for ways to save where possible. 

"Be critical in your examination of your budget – determine what's a 'need' and what's a 'want,'" says Tayne. "You may be able to cut back in some areas to free up funds to put into an emergency fund."

What should you focus on first — saving or paying off debt?

It might sound counter-intuitive, but the best place to start when you want to pay off debt is with a savings account, argues Dan Ariely, a behavioral economist and author of the books, "Dollars and Sense" and "Payoff."

"Saving for a rainy day helps people prove to themselves that they can achieve a goal, and it gives them a little extra confidence to manage their financial lives differently," Ariely tells Select.

If you are too cash-strapped to save up six month's worth of expenses, Ariely says to build a small savings account of at least $500 (and if you are supporting a family, aim for $500 per family member if possible). Many other experts recommend saving at least $1,000 before pivoting to intensive debt payoff.

While you save, you should still continue to make your minimum payments in order to protect your credit score.

Once you reach $500, begin putting any excess money toward your credit card debt each month. You can determine how much more you can afford to pay based on whatever extra cash remains in your account after you've covered your essentials. If possible, make the payments as soon as you get paid. You can even set up autopay to ensure you never miss a payment.

And every time you pay your credit card bill, you should also put 5% of whatever you put toward debt into savings, according to Ariely. So if you pay $650 toward your credit card balance every month, try to put at least $32.50 into your savings, too. In six months, you'll have saved nearly $200 in addition to the first $500 (bringing your savings account nearly to $700), and you'll have paid off about $3,900 of debt (excluding interest).

As your economic situation improves, you can work to increase the amount you save every month incrementally. The important part is getting into the habit.

Using a balance transfer card to get out of debt

Another way to get out of debt is to transfer an existing balance to a no-fee balance transfer credit card like the Wings Visa Platinum Card. It offers 0% interest on your first 12 months (then 8.15% to 18.00% variable APR). Having a timeline can help you stay motivated and pay down your debt faster than you expected

"But the risk with a 0% APR credit card is that those credit cards start with very good terms and then the terms become very difficult down the line," explains Ariely. 

While 0% APR cards are one of the most effective ways to get out of credit card debt, you have to know how they work. Each balance transfer credit card comes with its own set of terms, agreements and fees. Most have a balance transfer fee of 2% to 5% that you will have to factor into your budget. 

And the savings are undeniable: With a card like the Aspire Platinum Mastercard®, which has a 2% balance transfer fee and no interest for six billing cycles (after 8.15% to 18.00% variable APR), you could pay off a $3,000 balance in roughly six months with payments of $500 per month. Your only fee would be the $60 balance transfer fee.

On the other hand, if you kept this $3,000 on a card with a variable APR of 25.24%, it would take you seven months to pay off your debt, compared to six, and you would pay an additional $241 in interest fees. 

Instead of making an extra $500 payment and putting $241 toward interest charges, you could use this savings to open a high-interest savings account that lets you earn 1.5% to 2% interest per year. And you can continue adding to your savings account once the debt is wiped out in six months since you'll be in the good habit of setting aside $500 in the budget.

If you use this strategy, Ariely advises that you "make sure you read the terms and have the money to pay your debt when needed." Otherwise, you'll be right back to paying interest after the promotional financing period ends.

Learn how to make the most of your balance transfer and what to do once your balance transfer is complete.

How to pick a savings account during an emergency

"Generally, it's beneficial to save into an account that accrues interest," Tayne tells Select, such as a high-yield online savings account. That way, "your money will grow by simply sitting in the account, and the more money you have in the account, the more quickly it will grow."

But in an emergency, you have to consider how quickly you'll be able to access your money.

"Often the accounts with the best interest rates have the longest period of time to retrieve your money from the account," explains Tayne. "Emergencies often mean you need the money right away, so consider whether the expediency of getting your money is an important factor before signing up."

How to stay motivated during debt payoff

While debt payoff is satisfying once you've reached your goal, it can be hard to stay motivated on the journey.

"Paying off debt is invisible," says Ariely. "If you go out and buy food for your family and toys for your kids, your family members express gratitude. It feels good for your family, and you feel the happiness it brings.

"On the other hand, paying of debt is a thankless task. Nobody sees it or appreciates it," he says. So you have to make it concrete.

How do you make the invisible, visible?

"One way would be to put a chart in the kitchen or somewhere that is public," says Ariely. "I wouldn't put the numbers, but I would put a bar that shows your entire debt as a family, then show every step along the way to indicate how much debt you are paying off."

This is good for both parents and children, who are sometimes not aware of the many ways they are being taken care of in ways they don't always see, Ariely says

"The best thing we can do is get people in our family circle to realize that we are paying off debt and by doing so we are taking care of our family."

Coronavirus latest:

Information about the Wings Visa Platinum Card, Aspire Platinum Mastercard® and Citi Simplicity® Card has been collected independently by Select and has not been reviewed or provided by the issuer of the card prior to publication.

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
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