One in four American adults or 22% say they have no savings to cover emergencies. Having extra money is indispensable to pay for unanticipated expenses, basic living costs due to job loss, accidents, injuries, and even deaths. Without a buffer, the tendency is to turn to credit cards or loans to cover unforeseen expenditures. Unfortunately, those with outstanding loans will find it difficult to start a savings fund that will help pay for the unexpected. In fact, the first step to stashing money aside for rainy days is to manage debts. Debt consolidation is one way to start building up reserves for emergencies.
Preparing for the Unexpected
Sometimes, no matter how prepared you are, life will still throw curveballs at you. Emergencies and accidents are examples of those surprising events. Say a motor vehicle crash caused serious damage to property and injuries to the victim. In addition to hefty medical bills for doctors, meds, tests, expert consultations, rehab, and counseling, the injured party might miss days of work leading to economic loss. Without a rainy-day fund, it is not possible to cope with daily living expenses given lost productivity. Professionals at Doug Beam recommend pursuing a solid personal injury claim for financial compensation to pay for medical expenses, lost wages and income, and property damage. Ideally though, everyone must be able to face worst case scenarios.
If you have existing debt and there is no savings, it can only make matters worse in the case of an accident. On top of daily expenses, there are extra costs to face such as doctor’s bills and medicine. In the meantime, the debt and associated service fees are running. Nonetheless, starting an emergency fund is vital to cope with eventualities in life. The first step is to eliminate debt as quickly as possible. Debt consolidation can improve the financial situation combining multiple loans into a single loan or payment. As there is only a single monthly payment to manage instead of multiple payments to different debts, it is easier to keep track of payments and due dates. If a lower a consolidation loan or credit card is secured that has a lower interest rate, it could save money over time. Compared to paying off high interest bearing loans, the money that is saved can be used to pay what is owed faster.
Starting an Emergency Reserve
Another benefit of a consolidation loan is that monthly payments might be lower than the combined disbursements of all debts if it has a lower interest rate or even a longer repayment term. Cash flow is improved making it more manageable to meet financial obligations. Consistently making on-time payments also positively impacts credit score over time demonstrating responsible financial behavior.
Nevertheless, it is critical to address underlying financial issues that led to the accumulation of debts in the first place. Developing healthy financial habits before pursuing debt consolidation could potentially lead to problems in the future. Creating a realistic budget, tracking spending, eliminating impulse spending, and setting financial goals are examples of sound financial strategies. In the end, debt consolidation should be part of a larger strategy to achieve financial stability.
Building a savings fund is challenging if there are existing debts. However, debt consolidation can play a role in eliminating debt and eventually, improve financial health enabling the creation of an emergency reserve.