Photo by Clay Banks on Unsplash

I’ve seen a trend lately of people who aren’t in serious debt trouble, but who are carrying a relatively small amount of credit card debt – a few thousand dollars – and are having difficulty breaking that cycle. In nearly every case, they also have no cash savings. Spoiler alert: this is not a coincidence.

We all have expenses that pop up from time to time which often fall into the following categories: car or home repairs, medical or vet bills, and kid expenses. You may know that you’re going to need new tires on your car, or you may be surprised by a trip to the ER, but these things pop up all the time, and many times are too big to be paid for out of your monthly cash flow. You need a cash cushion to absorb them so that you don’t resort to putting the expense on your credit card with no real plan to pay it off.

The most important thing I can tell you is this: Credit card debt becomes nearly impossible to pay off if you’re continuing to use the credit cards, as it’s a moving target. You have to stop using your credit cards if you want to pay them off. The only way to avoid using them going forward is to have some amount of cash available to cover unexpected expenses. Many people in this situation throw every extra dollar at their credit card debt, because it’s carrying such a high interest rate, and they know that that’s a bad thing. But that means that they never have savings when they need it.

My advice to people in this situation usually looks something like this:

1. Set up a savings account in your bank and fund it however you can – with your tax refund or a bonus or more gradually, with monthly automatic transfers. Aim for an initial goal of $2,000-$3,000, and don’t stop saving until you get there.

2. Use that savings to pay for things that you can’t manage out of regular cash flow. Do everything you can to avoid using credit cards.

3. Figure out how much you can afford to pay on your credit cards each month, and make that a priority. You may have to make other sacrifices for a period of time to get rid of this debt.

4. Consider ways to reduce the interest rate on your credit cards, whether that’s by negotiating down the rate, transferring to a 0% interest credit card, or a personal loan from a bank.

5. If you’re still building your savings and find yourself with “extra” money – whether you’re in a 3-paycheck month, your car is finally paid off, or it’s bonus time at work, put half of that money towards your savings account and half toward your credit card debt. If your savings account is already at a comfortable level, you can put all the money towards your debt.

6. Once your credit card debt is paid off, use the monthly payments to increase that savings cushion to a higher level – maybe something in the $5,000-$10,000 range.

This savings cushion is different from a true emergency fund. An emergency fund is designed to be available to pay the mortgage or rent and to put food on the table if you experience a life-changing event such as a job loss or severe illness. That money is sacred and should be only touched in cases of true emergencies. People with credit card debt usually don’t have an emergency fund, or any savings at all. I try to have them start with a modest savings account as described above, and then once they’re out of high-interest debt they can make serious progress towards building a real emergency fund. It’s very difficult to build an emergency fund if you’re also facing 22% interest rates on your credit card debt.

I have some clients who I see on an ongoing basis who have been remarkably successful in getting a handle on their credit card debt and also building a small savings cushion at the same time. The key is usually their level of motivation; if they’re done with debt and can’t take it anymore, I find that they are able to take the necessary steps to build this small amount of savings, and they stop using credit cards entirely – often they choose to cut them up as part of the process. They can see the light at the end of the tunnel and can visualize what their lives will be like when hundreds or thousands of dollars aren’t going out the door every month to pay down old credit card debt.