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Six steps to build your savings

[Jul 29, 2011.]

 

Many consumers lack savings and live paycheck to paycheck, but when the electric bill spikes or a child needs a costly prescription, a payday loan can sometimes be the only available solution. A step-by-step approach to a spending plan can help you rely less on payday lenders and more on your own funds.


Six steps to financial security


1. Pay off your payday loans. While quick payday loans can be helpful in an emergency, they are also costly, especially if you don't pay them off on time. Focus first on eliminating any payday loan debt.


2. Decide how much you need in a basic emergency fund. While financial experts will tell you to save three to six months of expenses and financial guru Dave Ramsey says to save at least $1,000, saving that much money can take a long time. Decide how much you need based on your individual circumstances. In an article on MSNMoney.com, one financial expert suggests evaluating available sources of income in an emergency such as a spouse's income, family support and even your risk of a job loss before deciding how fast you need to allocate money to your emergency fund.


3. Save enough to cover one month of expenses. The "Dough Roller," writing on MSNMoney.com, suggests saving enough to cover all your bills for one month as a start. The simplest way to do this is to set up an automatic transfer of funds from your paycheck to a savings account and cutting back on spending to make sure you can still pay your bills.


4. Split your savings between your debt and your emergency fund. Once you have saved enough to cover one month's expenses and have grown used to your new spending plan, start splitting your savings between paying off credit card debt and stashing the cash in your emergency fund.


5. Repay debt faster. After you have built up your emergency fund to your comfort level, start taking all your savings and applying them to credit card debt. If you have more than one credit card, try Dave Ramsey's "snowball" approach: pay only the minimum on all accounts except one, then pay off that one card with every available dollar. Once that card has been repaid you can apply the money you have been using for that debt to the next card, maintaining minimum payments on all other cards. One by one, your credit cards will be repaid in full as long as you don't make additional charges.


6. Debt free? Start saving more. Once you have pulled yourself out of debt, you can apply your extra money to meet other savings goals such as a larger emergency fund, a retirement fund, a college tuition fund or even a vacation fund. It all starts with slowly paying off one bill at a time.


If you find yourself relying on payday loans on a regular basis, try the steps above for a personal debt relief program or find a responsible credit counselor at NFCC.org.


 

About Author:

Michele Lerner is a freelance writer with twenty years of experience writing articles and web content for newspapers and magazines on topics related to real estate, personal finance, and business.

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