Please ensure Javascript is enabled for purposes of website accessibility

This 1 Mistake Could Land You in a World of Debt

By Maurie Backman – May 16, 2019 at 7:36PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The good news? You can take steps to avoid it.

Life has a way of messing up our finances when we least expect it. You could wake up one morning to a leaky roof, a busted heating system, or a broken air conditioner in the middle of summer. You could try starting your car only to find that it just won't run. You could get hurt, or get sick, and wind up in the hospital for days on end. And even if you're the most well-liked person at the office, you could come into work one day and find yourself on the wrong end of a layoff.

All of these unplanned scenarios are apt to cost you money in one shape or form, which is why you really need money in the bank to protect yourself from life's financial unknowns. Yet an estimated 40% of Americans don't have enough savings to cover a mere $400 emergency.

Woman sitting on couch with a laptop in her lap, holding her head as if upset


If you don't make an effort to build an emergency fund, you'll likely have no choice but to rack up serious debt the next time an unanticipated expense hits you out of the blue. And that's problematic on several levels.

First, if you charge a large expense on a credit card and carry a balance for years because of it, you'll accrue loads of costly interest. Additionally, carrying too high a credit card balance could bring down your credit score; this means the next time you attempt to borrow money, sign a lease, or do anything that requires an investigation into your credit, you risk getting denied, or getting stuck with really unfavorable terms (such as a ridiculously high interest rate for a loan).

Having emergency savings, on the other hand, could help you avoid debt and the financial troubles that come with it. If you're not sure how to build that safety net, here are a couple of good ways to get started.

1. Cut expenses in your budget

A solid emergency fund is one with enough money to cover a minimum of three months' worth of essential living expenses. Now that's not the sort of cash you can accumulate in a week or two, but if you make an effort to cut back on spending over the course of six months to a year, you might get there. What expenses should you cut? If you're without savings at all, as many as you're willing.

A good approach is to take a look at your budget, or create one if you don't have one yet, and figure out which expenses of yours would be easiest to slash. For example, it's easier to cut out restaurant meals or cancel a gym membership and cable than it is to pack up and move to a cheaper home. On the other hand, if you're a renter and your lease is coming to an end anyway, you might decide to downsize your living space for a year, bank some savings, and upsize once you're in a stronger place financially. The choice is yours, but the key is to cut back on spending in a meaningful way.

2. Get a second job

When you work full-time, the last thing you want to do in your spare time is work. But if you find the right side hustle, you won't have to. These days, there are a host of hobbies you can turn into a job, so find something you enjoy doing that you're also able to monetize. For example, if you love to cook, cater private events on weekends. If you enjoy graphic design, work on companies' websites a few evenings a week. The beauty of getting a second job is that your earnings from it won't already be allocated to existing bills, so you should have no trouble sticking that money right in the bank.

The longer you walk around without savings, the more you risk racking up debt. So don't let that happen. Focus on building an emergency fund, and enjoy the peace of mind that comes with it.

The Motley Fool has a disclosure policy.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.