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Build emergency savings to avoid having to take out personal loans

[Sep 5, 2010.]

 

Building up an emergency savings fund can help you get off the debt treadmill once and for all. While a personal loan or credit card help during tough financial times, borrowing money this way can result in long-term financial hardship if you have trouble paying it off. Consider the following tips about creating a cash cushion that can be used for surprise expenses and help you pay off debt from loans and credit cards.

Money in the bank

Personal finance expert Dave Ramsey recommends building an emergency cash reserve of $1,000 before seriously tackling debt. That's because no matter what situation you find yourself in, there is bound to be some sort of financial emergency in your future. Once you have $1,000 in the bank, you can ramp up your debt reduction efforts by putting extra money toward personal loans, credit cards, or auto loans. Pay off high interest debt as quickly as you can to minimize interest payments over the long term. Once you've knocked out your debt you can build up the emergency fund even more.

Fast loan will cost you

An emergency fund keeps you from turning toward high-interest debt in a pinch. Many desperate folks turn to high-interest payday loan shops to get them through the next payday. The problem with borrowing a fast loan from one of these outfits is that you're likely to end up paying interest rates of 300 percent APY and up if you continue to roll the loan over instead of paying it off.

Another reason it pays to have an emergency fund is to avoid paying high interest on credit cards. It's very easy to whip out plastic to pay for that car repair, doctor's visit, your kid's sports equipment or a surprise expense (or impulse buy). But unless you pay off the balance at the end of the month you're going to pay finance charges. Even if you have to dip into an emergency fund you can always build it back up again without worrying about interest charges.

Liquid savings accounts

The best place to park emergency cash is in a savings or money market account that can be accessed easily. Savings rates are pretty paltry these days, but putting money in a liquid account can give you the peace of mind that comes from knowing the money is accessible if needed. While personal loans and credit cards have their uses, they should not take the place of an emergency fund.

 

About Author:

Francine L. Huff is a freelance journalist and the author of The 25-Day Money Makeover for Women. She has appeared on a variety of TV and radio shows.

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