Rainy Day

Being in debt is like being stuck on a roller coaster that never ends. Just when you’ve made some progress in paying down your balances, life smacks you with some unexpected expense that sends you right back on the debt coaster.

So how do you break the cycle? Is it smart or even possible to save for a rainy day when you’re paying off high interest debt? We’re going share some tips with you on how to and why you should build an emergency fund even if you’re paying down credit card balances.

Start with a Goal of Saving $500 to a $1,000

While ideally you would set aside an emergency fund worth 3 to 6 months of your living expenses, setting aside just $500 to $1,000 can be a great start in helping you break the debt cycle. This amount can often help you deal with unexpected expenses like a dental bill or car repair cost that seem to pop up all too often. This small emergency fund will keep you from pulling out the credit card and increasing your balance.

I know that building an emergency fund is easier said than done. One of the hardest parts of dealing with debt is that the high monthly payments seem to suck up your entire paycheck. It makes you feel like you’ll never get ahead. The first step, however, is to track your spending for the next couple months, and figure out what your lifestyle really costs. Use Budget Tracker’s free tools to make the process easier, and read our past post on how to stick to a budget.

Find a Way to Cut $50 From Your Monthly Bills

Once you have a good idea of where you’re money is going each month, find something you can cut. Can you eat at home more often? Can you call 3 or 4 different auto and home insurance providers to get new quotes? Can you call your Internet provider and their competitor to make sure you’re getting the best deal? If you’re paying back federal student loans, can you review your payment options (here is the link for Federal Student Aid) to see if you can lower your monthly payments? Get creative, and scrutinize every expense.

Another option to increase your cash flow is to bring in some extra money. Again, think creatively. Could you babysit one or two nights a week? Could you provide online tutoring? Check out websites like Care.com or Tutor.com to see if they make sense for you.

Make Saving Automatic

Once you’ve found a way to lower you monthly expenses or bring in some extra cash, set up automatic monthly or weekly transfers to a savings account.

Another easy option to help you build an emergency fund is a new feature that many banks are offering. The bank will transfer $1 to your savings account from your checking account every time you swipe your debit card. So instead of spending $76 at the grocery store, you will spend $77, and that extra dollar will be added to your savings. It’s a pretty painless way to help you build your emergency fund. Ask your bank about this option.

Save Bonuses, Raises, & Tax Refunds

The next time you receive a chunk of cash from a bonus, tax refund, or gift, divide it into 3 parts. Set aside one part for savings, one part for paying back debt, and the third part for having fun.

I realize this advice might be a bit unconventional. From a purely financial perspective, any extra money you have should go towards paying high interest debt in order to pay the least amount of interest. Depending on your personality that philosophy may work. For most of us, never giving ourselves permission to enjoy our money leads to burnout. It also gives us a little peace of mind to know we have a small cushion set aside for unexpected expenses.

On a side note, if you receive a large tax refund every year, consider lowering the amount of taxes that come out of each paycheck. This will increase your monthly cash flow, and help you use your credit cards less often. Talk to your HR department, and ask them about filling out a new W4.

Keep Your Credit Cards at Home

I know that trying to save while paying down debt can feel like two competing and impossible goals. It’s not going to be easy, but with the right planning you can make it happen.

The first step you should take right now is to open up your wallet, and take out your credit cards. Tuck them away in the back of a drawer where you can’t easily access them. Tell yourself that from this day forward, you will not use your credit cards to add to your debt.

Free yourself, and give yourself permission to say no. Say no to eating out with friends at expensive restaurants. Suggest a cheap or free alternative. Say no to your kids when they ask for new toys while many of their other toys go unused. Say no to yourself when a new sweater catches your eye. Think of all the beautiful sweaters hanging in your closet. This mentality doesn’t have to last forever just long enough for you to get a handle on your finances.

Once you’ve made that important commitment to not take on any new debt, you can start forming a plan to tackle old balances and save for a rainy day.