Planning for an emergency fund after credit card debt

If you are trying to get out from the grip of a credit card debt, it's important to build up an emergency fund to stop the temptation to reach for the card again. Here are some tips to help you build up that fund.

How much money do I need?

Ideally, you want to build up to having 3 months of living expenses, to cover any expenses as well as losing your income source. This doesn't need to be your current living expenses, rather a pared down amount that you could live on if you need to live simply for a few months. Look at the amount you need for rent, bills and food as well as any other regular expenses that you need to pay.

Where should I keep it?

You need to ensure that you can't easily access the funds, so don't leave them in your normal transaction account (or hidden under the bed!). A good place to keep your emergency funds is in an online only account which offers a high rate of interest and is still easy to transfer into your account in an emergency (but not tempting you each time you do your day-to-day banking). While longer term savings can be held in places that earn higher returns such as share funds, due to the fluctuations in the market this isn't a good place to keep your emergency funds. (You don't want to be laid off by your employer, as well as facing a stock market collapse and reduction in your emergency savings at the same time.)  

What counts as an emergency?

You are the only one who can decide on what is an emergency in your budget, but generally this should be an event that you can't have planned for. Large annual (but regular) bills such as car registration and rates should be included in your regular budgets, as should average amounts for medical expenses, house maintenance and other amounts that come in on an irregular basis. 

Where do I get the money?

Now that you've pared down your budget to pay off that nasty credit card debt, you can start redirecting your payments into building your emergency fund. You can also funnel other large payments such as work bonuses or tax returns into this account. 

If you would like more advice on building an emergency fund, you should speak to a financial advisor, who can give advice specific to your circumstances.

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